The Room : Government

The Room – 06/19/2009

David Galland — Fri, 19 Jun 2009 19:57:00 GMT

Dear Reader,

David is taking a well-deserved week off, so this week you’re hearing from Olivier.

While David may be off duty, it didn’t prevent him from submitting an interesting article sent by one of our subscribers, along with a couple of comments.

Telegraph: U.S. cities may have to be bulldozed in order to survive

Dozens of U.S. cities may have entire neighborhoods bulldozed as part of drastic "shrink to survive" proposals being considered by the Obama administration to tackle economic decline.

Olivier again. Definitely a creative plan that may prove to be a better use of federal dollars than most of the other infrastructure development projects contemplated by the administration. The problem with most new infrastructure projects is that they end up adding operating and maintenance costs to municipalities and states that can’t really afford them. At least the “wrecking ball programs” should result in decreased long-term overhead for the cities that implement them.

The First 150 Days

Yesterday marked the end of Obama’s first 150 days at the helm of the U.S. of A. None of us doubted that Obama was a savvy and ambitious politician, but even we are impressed by the sheer number of new initiatives the president has undertaken. In less than five months, there are very few campaign promises he has failed to tackle.

One has to wonder, however, whether Obama may be failing to deliver on the biggest of his campaign promises – that of bringing change to Washington. Weren’t we supposed to see the end of politics as usual and of government waste and pork? Instead, we’ve gotten more of the same, with Ben Bernanke, Larry Summers, and their ilk still in charge and Geithner replacing Paulson. The doors continue to revolve between Wall Street and K Street, with the same cabal influencing policy.

Given my inclination to look at facts rather than listen to pronouncements, here is my assessment of the State of the Union after 150 days. Let’s look at a balance sheet of achievements with assets and liabilities as of June 18.

Starting with the assets:

While we have not returned to a healthy credit environment, it is undeniable that the massive injection of liquidity into the financial system by the Fed and the Treasury has managed to thaw the credit freeze we experienced last fall.
After declining by 24% from January 1 through March 9, the S&P 500 has managed to recover and closed at $918 yesterday, up 3.4% for the year in spite of a sharp contraction of real GDP (-5.7%). This may be explained by a reported increase in corporate profits for Q1 (+$42.6 billion, although non-financials declined by $64.2 billion).

One may wonder, however, if the $116.1 billion Q1 increase in profits from the financial sector (following a $178.7 billion decrease in Q4 2008) had anything to do with the changes in the FASB mark-to-market rules that were conveniently adopted by this regulatory board on April 2. (This change did not allow financial institutions to restate 2008 results but, interestingly enough, allowed them to apply the new rules retroactively to Q1 results.)
A better-than-expected unemployment report for May 2009. Non-farm employment figures fell by “only” 345,000 compared to a decline of 504,000 in April. Yet the unemployment rate has continued to grow to an all-time high of 9.8% (for the record, it was 5.3% in May 2008).
Total housing starts increased to 532,000 in May from 454,000 in April. The lowest since the Census Bureau began tracking housing starts in 1959.
Foreclosure filings dipped 6% in May compared to April. Yet they increased 18% from May 2008, marking the third highest month on record. "There were almost one million foreclosure filings in a three-month period, and that's simply unprecedented," reported Rick Sharga, senior vice president at RealtyTrac.
The University of Michigan Consumer Sentiment Index for May hit its highest level since last September, indicating that while consumers are still relatively glum, they are increasingly hopeful the economy will experience a turnaround in the next few months. The final index at 68.7 was higher than April’s 65.1 and November’s 28-year low of 55.3.

So maybe there is some light at the end of the tunnel, and the markets are anticipating the 2009 fourth-quarter recovery Ben Bernanke promised us last March in his 60 Minutes interview. Given Chairman Ben’s track record, though, I wouldn’t bet on a recovery just yet, so let’s turn to the liabilities:

Back in early March, the Obama administration released its forecast for the federal budget for the remainder of 2009 (ending 9/30/09). While the 2009 deficit announced was a staggering $1.8 trillion – four times that of 2008 – the plan is that we will start to see a progressive return to reasonable levels after a few years. Unfortunately, it is already certain that once again actual deficits and unfunded liabilities will rise far beyond current plans. So far, tax receipts are $100 billion lower than forecasted in Obama’s budget, and I doubt that actual spending will come in below.
The Public-Private Investment Partnership (PPIP), announced with great fanfare by Tim Geithner in March, has yet to attract investors. While banks appear to have returned to health, they are still undercapitalized and loaded with toxic assets ready to explode with the next round of bad news.
Over the first five months of 2009, unemployment rose by 3.4 million to 14.5 million.
Foreclosures have declined slightly, but the number of foreclosures from prime borrowers (as opposed to subprime and Alt-A “problem” loans) is rising quickly as job losses increase. We can expect more defaults as a result of the recent layoffs, and we have yet to hit the next wave of Alt-A loan resets that is forecasted to hit later this year and to continue through 2011. The number of new homebuyers may be dwindling soon, too – while 30-year mortgage rates are still low, they are definitely rising. More stringent lending standards and higher rates do not bode well for a recovery in the residential markets.
Commercial real estate is only beginning to see the full impact of the recession. A tight lending environment, stricter loan-to-value ratios, declines in property values, lower occupancy rates, and the lower overall profitability of most properties mean that we will continue to see an increase in defaults in the commercial sector for quite some time.
The Obama administration’s big push for alternative, “green” energies and for a cap on carbon emission is sure to cost American taxpayers and businesses hundreds of billions of dollars while providing no guarantees that it will have any real impact on reducing our dependency on imported hydrocarbons. The administration shows very little support for the only real short- to medium-term alternatives: clean coal, domestic oil and natural gas, and nuclear. In fact, many projects are being curtailed due to lower energy prices and regulatory hurdles and threats.
Not only are we staying in the nightmare of the Iraqi war, we are expanding our involvement in Afghanistan and are drawing closer to involvement in Pakistan --

leading to yesterday’s Senate approval of the war supplemental. Who knows, we may soon be liberating North Korea too.
While universal health care may be a popular concept, it will come at a hefty price, and according to the Congressional Budget Office, it will definitely add to the already staggering, unfunded liabilities of Medicare and Social Security. Who will pay the bill?
Why, the “rich,” of course! By rich, I mean those earning over $250,000 a year. Of course, since raising taxes on the rich and carbon-emitting businesses won’t suffice, new forms of taxation – such as a federal VAT – are being seriously considered in DC. In fact, if you want to get a deeper understanding of the impact of the first 150 days of the Obama administration on future taxation, you should check this link to the Americans for Tax Reform website:. While probably not totally unbiased, it provides a sobering look at what may be upon us.
Inflation is still relatively tame. As we have explained time after time in our publications, we expect the deflationary impact of the recent burst in the asset bubble to soon be overcome by monetary expansion and runaway inflation. As the deficit widens and foreigners lose confidence in the dollar, we can expect the Fed to fill the gap by running its printing presses overtime.
The bailout of the financial, insurance, and auto industries has not only cost taxpayers an enormous amount of money, it is also a clear step towards government control of the private sector.
It is becoming clear that the federal government is challenging contractual rights in the name of the War on Crisis. In the past few months, the protection of stakeholders under bankruptcy has been trampled, contractual bonus obligations have been voided, mortgage lenders have seen foreclosure rights eliminated, and corporations have seen management and capital structure overhauled by bureaucrats without shareholders’ approval. Yet the administration states that private enterprise is the principal element of any economic recovery. Unless coerced, what private investor will want to invest in a challenging economic environment without contractual protections?

One of our subscribers, Tommy K, forwarded a cartoon that appeared in 1934 in the Chicago Tribune. It wouldn’t be too hard to make it current and relevant to our times.

Enough ranting on the state of the union, though. Let me turn to Bud Conrad, who will enlighten us on whether the current stock market rally is the beginning of a recovery or one of those bear market rallies common in serious recessions. I will let you draw your own conclusions.

Where Did the Wealth Go?

Bud Conrad, June 2009

The drop in housing and the stock market decreased consumers’ desire to spend. To understand how big the impact is, I have taken the Federal Reserve’s latest data that was published on June 11 to see what the effect is on the assets of households and nonprofit organizations. The chart below shows all the assets added together are generally growing through the end of 2007. It then shows the levels of decline through the end of the first quarter of 2009. The drop in all assets combined was $12 trillion in just over a year's time. The biggest downturn is in stock market valuation ($7 trillion), and the second-biggest drop in housing ($3 trillion).

Household liabilities decreased a very small amount by comparison. That makes sense, because housing prices can move much more rapidly than the debt on those houses. This very big decline in asset value is both the result of a slowing economy and the cause of future slow growth. As consumers feel less wealthy, they are less likely to spend. The conclusion to be drawn from this loss of wealth is that the slow economy will be with us for quite a while.

Foreigners Are Slowing Investment in the U.S.

Bud Conrad, June 2009

Foreign investment in the U.S. has been one of the supports for our government deficits and for our dollar. With foreigners questioning how large their holdings should grow, a closer look at the total cross-border flows gives some indication of what is going on.

Breaking down foreign purchases of securities into long-term and short-term gives an indication that while foreigners are not yet running away from the dollar, they are reluctant to hold long-term instruments. A logical interpretation is that by holding short-term paper, they retain more flexibility to shift their money towards new investments.

The conclusion from the data is that foreigners are starting to look for alternatives to U.S. investments. Their pronouncements confirm what they are doing. Important meetings are occurring, such as that of the Shanghai Cooperation Organization, where the U.S. was excluded this week and where they discussed looking for alternatives to the dollar.

Olivier again. There are still a few bears around on Wall Street. Goldman Sachs Chief Economist Jim O’Neill said financial markets could weaken in coming weeks amid concern over the government’s intentions to roll back stimulus packages.

See this link.

In fact, it does not take a seasoned economist or a PhD to figure out that there is more downside than upside in the stock market these days.

During the month of May, the S&P 500 traded at an average P/E ratio of 127.48, shattering the previous average monthly high of 58.66 in April. For historical reference, the average P/E for publicly traded U.S. stocks has been around 15.

You may ask, if we see clear signs of a correction and weakness in the dollar, and if inflation is around the corner, why hasn’t gold gone through the roof yet? I can give at least three reasons for its relative lack of strength ($934 this morning):

Seasonality. The gold price typically shows signs of weakness in the summer and picks up in the fall and winter months because of increased jewelry demand.
IMF gold sales. It is expected that the IMF will sell one eighth of its gold reserves (12.97 million ounces) to finance aid programs to developing economies hit by the current crisis.
Deflation. While we are forecasting inflation, there are still some strong deflationary forces at play. We do not anticipate the gold mania to start until deflation fully subsides.

So am I long on gold? More than ever. I see the current softness in prices of precious metal as an opportunity to continue to load up on bullion and stocks of major gold producers, as advised in our BIG GOLD newsletter. If you are not yet a BIG GOLD subscriber, you may want to check it out and follow our recommendations.

Speaking of gold, you may have seen the following article on our site or others: Mint moves to halt possible “run” on gold.

On the same subject, one of our subscribers reports:

Notes from the Field

Although he was just back from a trip to Colombia, Louis James hopped on a plane again this week to go down to Mexico and check out Mexican silver properties there. Louis just sent along preliminary notes from his visit.

International Speculator

A Centrally Controlled Economy?

This week has seen another flurry of activity in Washington. It started with an announcement by Obama on the Financial Regulatory Reform granting the Fed broad authority as a super regulator. After studying the White Paper issued by the White House, our Bud Conrad had the following comments:

We are quickly moving to a centrally controlled economy, private ownership be damned. The source of my opinion is the already 80 pages of general description of the thousands of bureaucrats that will be assigned to direct the economy and not just limit the excesses.
One of the most problematic parts of the proposal, in my opinion, is that the Federal Reserve would be given yet more power and responsibilities in the face of its abject failure to understand and deal with the ongoing economic situation.
The Federal Reserve has stepped beyond its original charter to manage the monetary system and has been taking on loans and responsibilities for specific financial institutions. Look at Mr. Bernanke’s reaction to the simple inquiry by Congress to reveal the names of the institutions to which the Fed handed out almost $1 trillion: he flatly refused to comply.
We don't need more bureaucracy. We need more accountability and prosecution of the crooks that brought us here in the first place. What we will get is an expensive bureaucracy, many reporting requirements, and overhead. This system will add a great burden to the efficient operations of our financial systems.
If exporting manufacturing jobs offshore has hurt our economy, think of what a constipated regulatory system will do to our financial institutions: they will go somewhere else, taking jobs and wealth with them.

I have to say, having the Fed as an unregulated super-regulator is a scary thought.

But there are reports on more activities on Capitol Hill…

Audit the Fed

Don Grove, Casey Research Washington correspondent

The Federal Reserve Transparency Act would require the first audit ever of the Federal Reserve. The bill has 234 sponsors, a comfortable majority of the members of the House, and is gaining momentum.

The Obama administration should be delighted, given its commitment to transparency in government.

Drill, Baby, Drill!

The Senate Energy and Natural Resources Committee adopted an amendment to its energy bill that would allow oil and gas drilling within 45 miles of the Florida coast. If the Senate climate bill becomes law with the Florida drilling amendment intact, it could be sufficient to derail the whole climate bill. "We're simply not going to let this happen," said Bill Nelson (D-Fla).

Yes! That's what I like to hear! As long as they are bickering among themselves, there is less chance they will do any real mischief.

Back to Olivier .

On the subject of hydrocarbons, you may be interested in this article about the recently released 2009 International Energy Outlook. This year’s report released by the Energy Information Administration (EIA) includes the first acknowledgement of Peak Oil by this agency.

At Casey Research, we are so bullish on energy that it will be the central theme of our next conference on September 18-20 in Denver, Colorado. Marin Katusa, Senior Editor of Casey Energy Opportunities, has been working on an extraordinary line-up of experts to cover both conventional and alternative energies in depth. If you have not done so, mark your calendar – registration will open soon.

As we all know, Europe has been struggling with the recession just as much as we have. For a while it appeared as though Italy might have just found the solution ($40 billion more or less) to its financial problems, thanks to the diligence of its border patrol officers, who detained two supposedly Japanese men with $134 billion worth of U.S Treasury bonds in a suitcase.

Check out this story from Asia News: U.S. government securities seized from Japanese nationals not clear whether real or fake.

Unfortunately for Italy, Bloomberg reported yesterday that according to the U.S. government, the notes are fake..

Building Without the Proper Permits

Jacques T. sent us this very funny email I would like to share. Purportedly, this is an actual letter sent to a man named Ryan DeVries regarding a pond on his property. It was sent by the Pennsylvania Department of Environmental Quality, State of Pennsylvania.

While we haven’t verified if this is real or a hoax, it’s quite amusing nonetheless.

SUBJECT: DEQ File No.97-59-0023; T11N; R10W, Sec. 20; Lycoming County

Dear Mr. DeVries:

It has come to the attention of the Department of Environmental Quality that there has been recent unauthorized activity on the above referenced parcel of property. You have been certified as the legal landowner and/or contractor who did the following unauthorized activity:

Construction and maintenance of two wood debris dams across the outlet stream of Spring Pond.

A permit must be issued prior to the start of this type of activity. A review of the Department's files shows that no permits have been issued. Therefore, the Department has determined that this activity is in violation of Part 301, Inland Lakes and Streams, of the Natural Resource and Environmental Protection Act, Act 451 of the Public Acts of 1994, being sections 324.30101 to 324.30113 of the Pennsylvania Compiled Laws, annotated.

The Department has been informed that one or both of the dams partially failed during a recent rain event, causing debris and flooding at downstream locations. We find that dams of this nature are inherently hazardous and cannot be permitted. The Department therefore orders you to cease and desist all activities at this location, and to restore the stream to a free-flow condition by removing all wood and brush forming the dams from the stream channel. All restoration work shall be completed no later than January 31, 2009.

Please notify this office when the restoration has been completed so that a follow-up site inspection may be scheduled by our staff. Failure to comply with this request or any further unauthorized activity on the site may result in this case being referred for elevated enforcement action. We anticipate and would appreciate your full cooperation in this matter. Please feel free to contact me at this office if you have any questions.

Sincerely,

David L. Price

District Representative and Water Management Division.

Here is the response sent back by Mr. DeVries:

Re: DEQ File No. 97-59-0023; T11N; R10W, Sec. 20; Lycoming County

Dear Mr. Price,

Your certified letter dated 12/17/07 has been handed to me to respond to. I am the legal landowner but not the Contractor at 2088 Dagget Lane, Trout Run, Pennsylvania.

A couple of beavers are in the (State-unauthorized) process of constructing and maintaining two wood “debris” dams across the outlet stream of my spring pond. While I did not pay for, authorize, nor supervise their dam project, I think they would be highly offended that you call their skillful use of nature’s building materials “debris.”

I would like to challenge your department to attempt to emulate their dam project any time and/or any place you choose. I believe I can safely state there is no way you could ever match their dam skills, their dam resourcefulness, their dam ingenuity, their dam persistence, their dam determination and/or their dam work ethic.

These are the beavers/contractors you are seeking. As to your request, I do not think the beavers are aware that they must first fill out a dam permit prior to the start of this type of dam activity.

My first dam question to you is:

(1) Are you trying to discriminate against my spring pond beavers, or

(2) do you require all beavers throughout this state to conform to said dam request?

If you are not discriminating against these particular beavers, through the Freedom of Information Act, I request completed copies of all those other applicable beaver dam permits that have been issued.

(Perhaps we will see if there really is a dam violation of Part 301, Inland Lakes and Streams, of the Natural Resource and Environmental Protection Act, Act 451 of the Public Acts of 1994, being sections 324.30101 to 324.30113 of the Pennsylvania Compiled Laws, annotated.)

I have several concerns. My first concern is, aren't the beavers entitled to legal representation? The spring pond beavers are financially destitute and are unable to pay for said representation -- so the state will have to provide them with a dam lawyer. The Department's dam concern that either one or both of the dams failed during a recent rain event, causing flooding, is proof that this is a natural occurrence, which the Department is required to protect. In other words, we should leave the spring pond beavers alone rather than harassing them and calling them dam names…

Being unable to comply with your dam request, and being unable to contact you on your dam answering machine, I am sending this response to your dam office.

Thank you,

Ryan Devries & the Dam Beavers

Miscellaneous

We have received requests for new phyles. Several subscribers want to know if there are existing phyles in either Chicago, Manhattan, or in Massachusetts. No formal group have formed in these areas yet, but if you are interested in organizing or participating in such a group, let Megan know by sending an email to phyle@caseyresearch.com. She will be happy to facilitate contacts in these cities.

Tom in Melbourne, Australia, is interested in starting a new phyle there. Contact Megan if you live in the area, and she will coordinate with him.

Finally, Tommy K. is wondering if the Denver area phyle members would be interested in a summer meeting in Vail he would host with his wife.

12:50 pm… I’m afraid it is time for me to sign out. The Dow is slightly down, the S&P and TSX are up again, and commodities markets are quiet.

Thank you for reading and being a Casey subscriber.

Olivier Garret
CEO, Casey Research

The Room – 06/12/2009

David Galland — Fri, 12 Jun 2009 21:08:00 GMT

The Room Special Alert:

Casey Research Summit, this one dedicated to Energy and Special Situations

September 18 – 20 at the Westin Tabor Center in Denver

David

Dear Readers,

Again this week, I was admonished by one of your fellow dear readers, who recommended that I keep my political comments to myself. And furthermore that I, and the entire Casey team, should focus solely on finding the next great investment.

While I can’t and won’t argue with the latter part of his advice -- that is, after all, our overarching mandate, and a mandate we take seriously – I suspect the real issue is that the political views we occasionally express run contrary to those of the author of this rebuke.

Even so, if you give the matter any thought at all, you will almost have to conclude that the business of America is now hugely dependent on the business of government.

As a refresher, the following – compliments of the Encyclopedia of Business – describes the two major foundations economies have typically been built on in modern times: central planning and capitalism.

centrally planned economy

capitalism,

Now, I may be naïve about certain things, for example the autoeroticism of the sort apparently favored by the late David Carradine, but I’m not naïve enough to think that there is such a thing as a "pure" economy that fits either of those two descriptions to a T.

Therefore, the important thing is to understand where your particular economy – in my case, that of the United States – falls on the scale between the two systems.

I usually refuse to jump into the same rumpled bed as the hard right wing of the U.S. political spectrum, but they are probably waving their arms about the same economic concerns we comment on here and in our other publications from time to time.

What makes me different from the Limbaughs et al., and maybe it is a fading difference, is that I really would like the current administration to succeed. As I don't really like either party, either party will do – as long as that party makes intelligent choices about the role government should play in our daily lives.

President Obama appears to be a reasonable, intelligent, and certainly articulate human being. Therefore, I hold out hope that he will eventually come around to making the only logical decision that can be made about the path forward. If for no other reason than that choosing the wrong path will inevitably lead to election defeat.

To prove that simple point, it is hard to miss the rising tide of fiscally conservative attitudes evidenced in the polling booths during the recent European elections. Europe, which is not exactly known for its free-market policies, rose up as one and soundly defeated the hard left socialist candidates on the ballot.

Unfortunately, at this point, Obama and his many government operatives and sycophants appear to be speeding down the wrong road – the road that leads to a continued shift in the direction of a centrally planned economy.

For example, this week the House of Representatives passed a bill that meddles with the choices that Americans make regarding the cars they drive. The idea is to give a marketing boost to the new U.S.-owned auto companies. enticing consumers to buy new cars by taking up to $4,500 out of taxpayers’ pockets and giving the money to others. Those, in turn, give it to automakers that provide cars that drive at least two miles further per gallon in the tank.

Here’s a quick take on the bill from politico.com…

There has always been a problem with a centrally planned economy. When you remove the free market from the supply and demand equation or tamper with the free market, you cause unnatural dislocations and all manner of unintended consequences.

Of course, Mr. Obama enjoys strong union support, and we as taxpayers now own large shares in the American auto manufacturers. Therefore, the good intention of the central planners in Congress is that this "cash for clunkers" law will unleash a new wave of naked consumerism, returning the economy to the happy days we all wish for.

There are, however, more than a few flies in the ointment. Starting with the fact that for the last six years, the top-selling cars in these United States have all been produced by Japanese companies. While many of those cars are now built in the United States, they are not built in Detroit, and they are not built by GM or Chrysler.

It is also worth pointing out that all of the top sellers will easily qualify for the largess being offered by we the U.S. taxpayer. Perhaps the legislators hope that GM's new hybrid, the "Volt,” will ride to the rescue. But Toyota’s well-selling Prius hybrid – which has recently been redesigned, is a huge hit in Japan, and is expected to fare equally well in the U.S. – could throw a wrench in GM’s poorly laid-out plan. Especially because the Prius sells for about half of what the Volt is expected to debut at. With either car, you get the $4,500 rebate, so the choice comes down to this: do you want to pony up an extra $20,000 for a GM-made experiment or get a proven high-quality winner from Toyota for a lot less?

According to a study by researchers at Carnegie Mellon, the premium sought by GM can’t be rationalized:

plug-in hybrids

The problem is the added weight – and the cost of the batteries. The lifespan of the batteries is also a big question mark. According to an article on Mixed Power…

K.G. Duleep, managing director of consulting firm Energy & Environmental Analysis Inc. in Arlington, Virginia, and a researcher on a U.S. study on plug-ins and other advanced autos, said he is very skeptical about the lifespan of the batteries. “I’m very skeptical about the prospects for near-term durability of the batteries. Even in the lab, they aren’t lasting more than seven years,” said Duleep.
So, into the dogfight for what few automobiles will be sold in the crunch years ahead, the new and supposedly improved Government Motors (GM) will send an expensive, so far unproven entrant... which, according to the central planners, will be snapped up in such quantities as to knock off the reigning champs, all Japanese. My take: GM is a dead duck, and the Japanese will be the primary beneficiaries of this latest bit of central planning.

GM was delisted from the NASDAQ this week, and investors looking to buy it must turn to the disgraceful OTC Pink Sheets for their shares.

And this is what the central planners have deemed worthy of dropping $25 billion in taxpayer funds on.

Health Care, Everyone?

The central planners are also hard at work on putting the final bullet into the head of American healthcare. The first shot, Medicare, only severely wounded it.

Speaking of Medicare, the following data points may prove useful as you hear more and more about the greater efficiency supposedly gained by having the government expand its health options to cover everyone.

(FYI: Medicare Part A, passed into law in 1965, covers hospital visits for those over the age of 65 or with certain types of medical conditions; Part B, passed later, covers doctor’s visits and certain outpatient services; Part C allowed private insurers to provide the Medicare benefits; and Part D, passed in 2003, provided prescription drug benefits.)

So, how has that whole Medicare efficiency thing been working out?

The following is from "Medicare for All" Universal Health Care Would Not Solve the Problem of Rising Health Care Costs by David Hogberg, Ph.D.

The fiscal future of Medicare itself is bleak. The Medicare Trustees report notes that, by 2018, revenues for Part A will only be sufficient to cover 80 percent of its costs. By 2080, revenues will only cover 29 percent of costs. “Closing deficits of this magnitude,” the report warns, “will require very substantial increases in tax revenues and/or reductions in expenditures.” The prospects for Part B and Part D are not much better, with the report stating that revenues for those parts will “have to increase rapidly to match expected expenditure growth under current law.” From 2005-2080, the report predicts, Medicare’s share of GDP will rise from 2.7 percent to 11 percent.
There are numerous fiscal problems associated with any government-provided program, especially one that ignores pre-existing conditions, as is the case with the current legislation now being proposed. One is that greater accessibility at a lower cost – or for many, at no cost at all – and providing credits toward government payments to households with revenues of up to $110,000 will make people flock to the docs in large and steady numbers. And that, of course, will drive the cost of healthcare even higher. Call it an unintended consequence if you will, but I will call it a completely natural and to-be-expected consequence.

Thus, though the Obama administration projects that the nation will have to spend another trillion dollars it doesn't have providing medical care for all -- that number is certainly far off the actual tally required.

Again, according to Dr. Hogberg…

Why anyone would want to put every American in a program that is already nearing fiscal collapse is perplexing, to say the least.
As for dislocations, in the current legislation, private insurers will not be able to deny a person coverage for pre-existing conditions or charge them a higher premium. This bit of central planning means simply that everyone will have to pay a higher premium. Furthermore, companies in the healthcare industry will almost certainly have to compete with a government-run insurance program whose mandate will be to ensure that everyone can afford insurance.

Shareholders in private U.S. health insurance companies are already burdened by their share of the costs that those companies have to incur in order to comply with an estimated 130,000 pages of Medicare-related regulations. Now they will not only see the sheer quantity of those regulations ratchet up exponentially, but they’ll have to pay even higher taxes to support direct competition to their companies by the government.

All of which is to say that private insurers are going to have a very hard time competing against their own government, leading to the very real potential down the road for a sole U.S. healthcare insurance provider – “Mama Sam.”

And corporations that already provide insurance, or don't, will be forced to pay even more to the government in order to cover the cost of bringing all the uninsured under the umbrella.

Again quoting politico.com...

R. Bruce Josten, a lobbyist for the U.S. Chamber of Commerce, said: “We are disappointed, clearly.” He participated in weekly meetings with Kennedy’s committee, and the bill that resulted suggests “the only person who has skin in the game is the employers,” Josten said.
Josten is, of course, talking his own book. That's because employers – i.e., corporations – don't actually pay taxes. Consumers do when they purchase the products of those companies, whose costs are calibrated to cover expenses such as taxes. And so, American industry will have to raise the cost of its products, making them less competitive on the global stage.

This reduced competitiveness will result in American corporations going out of business, and more and more people will be added to the unemployment rolls, moving them out of the category of "net contributors" to the new healthcare system and into the category of "net recipients," sending costs ever higher.

Of course, one way that the government, having laid this bed of nails, might decide to respond is by adding entry barriers for foreign-made goods. Which, when you think about it, may be the solution to the automobile conundrum as well?

I'm not sure where one goes to school to learn the fine art of central planning, or even if such a school exists, but I'm fairly sure that even the best of such a school can adequately train its graduates in the effective, long-term, micromanagement of a complex system such as the U.S. economy – or any economy, for that matter.

Is there a potential bright spot for investors in all of this? I think passing of this healthcare legislation, which is a near certainty given the Democrats’ majority, will shake out the weaker insurance companies already buried under mountains of bad investments that are about to get a lot badder. And I have to believe that unless and until Mama Sam passes legislation prohibiting private insurance altogether, there will be a niche for an insurance company that charges very high premiums but promises quick care of the highest quality in return.

Faced with the alternatives of doing business with the upscale private provider or the far less expensive government option (or one of the private companies that try to compete on price with that entity), the bulk of individuals with pre-existing conditions or generally poor health will choose the less expensive option.

Now, I know this whole thing about universal healthcare will strike a negative chord with many of you, including many of our neighbors to the north. And, please don’t think of me as hard hearted. But this gets back to the idea of positive vs. negative rights. If you believe that we the people have the inalienable right to healthcare, then you might as well believe that we also have the right to three square meals a day, a respectable roof over the head, dental care, a top-quality education, a decent wardrobe, transportation to get to our jobs, day care for the kids, and so on and so forth.

The problem is, and always will be, how can you pay for all of this without coercively taking the money out of one family’s pocket in order to shift it into another’s? And by coercively, I mean the direct threat of imprisonment if you don’t hand over the cash. That violates the morally correct right that we should be free from threats of personal harm, extortion, and outright theft.

In fact, the very idea that some faceless government functionary can walk into my house, or my office, at any time and on any pretense and require me to spend my time and resources assisting him in going over my books so that he may demand more money from me – money that will then flow through the machine to be used to purposes I find personally abhorrent -- is a truly warped and disturbing concept.

At least with a consumption tax, you can make a voluntary decision as to which products you buy, with full knowledge of the taxes you’ll also pay. That is very much not the case with income taxes, property taxes, estate taxes, etc., ad nauseam.

Don’t get me started…

No More Big Bucks for You!

For today’s catalogue of evidence that we’re heading toward a centrally planned economy, I provide the following from Bloomberg this week…

Now, far be it from me to champion the insane pay levels of public company officers. But to actually get into the trenches and try to engineer those pay levels to something considered more politically correct strikes me as a serious step in the wrong direction. Shareholders of companies, which these days are mostly mutual funds and other institutions, need to pay a lot more attention to compensation practices than they obviously have been. And if they are too lazy to do so, then they deserve what they get, should they fail to get a level of corporate performance reflecting said pay.

Fortunately, We Have the Law

I wish I could stop there, but I can't. That's because this week, the faint glimmer of hope evaporated that I had felt when the Supreme Court put a halt to the Chrysler bankruptcy so that it might study the legality of the structure the government had imposed on the company’s stakeholders.

The claims of the secured bondholders in that company were – by tradition and legal rights that extend literally back to the beginning of America and to English law before that – superior to the unsecured claims of the union pension operators. Nevertheless, they were ignored and their legitimate claims set aside "for the public good."

Again, my sympathy goes out to pensioners who dedicated their working lives to a company whose executives may have been better qualified as washroom attendants. But to let one's emotions (or political ambitions) willy-nilly trump well-established law seems the height of insanity.

How, now that the precedent has been re-set, are bond investors – or, for that matter, any stakeholder in a company – supposed to evaluate the investments being offered to them? When commercial obligations can be tossed out the window for political expediency, what does that do to the legal certainty that is supposed to be such a big competitive advantage for America?

Commenting on the transaction, an official of the Treasury, which strong-armed the deal into existence, had this to say…

“This morning’s closing represents a proud moment in Chrysler’s storied history. The Chrysler-Fiat alliance has now exited the bankruptcy process and is poised to emerge as a competitive, viable automaker.”
Since we are relying on dictionaries today, let’s look up the word “proud” just to be sure we are understanding this member of officialdom clearly.

Relying on Webster this time,

prūd,

prod, prud, prou

prode

“Advantageous?” Sure, for the unions and, by extension, the political fortunes of Mr. Obama.

“Just?” Hardly. How is it that the unions put up nothing and get 55% of the company?

“Wise?” Politically, maybe. But turning commercial law on its head to try and bail out a twice bankrupt company? And handing the “new” company another $6 billion of money the government very much doesn’t have as an “exit” gift hardly seems intelligent, at least to me.

“Bold?” In my book, that is not the word I would use to describe the government’s bullying tactics, including publicly vilifying legitimate bond holders.

No, proud is not a word I would associate with this takeover. Expedient, reckless, capricious… all of those words seem far more appropriate.

This is one of those seminal events that has the potential to be with us for a very long time – in future bankruptcy proceedings, which I expect we'll see a lot of – and in the very structure of capital markets.

Capital Gains… What Capital Gains?

David M., the coordinator of our SoCal Phyle, sent along an interesting essay written by Chriss Street, the treasurer/tax collector of Orange County, California. He argues against states spending beyond their means, and also against a bailout of the states by the federal government. The essay is worth reading, and you can do so here.

I thought the following excerpt from Street’s essay is especially noteworthy, given the coming increase in capital gains taxes…

All of which raises the question, where is California going to get the money it needs to dig itself out of its current hole… now expected to ring in at about $25 billion for the year?

Why, Mama Sam, of course.

The Road Less Traveled

While we don’t talk about it much, I feel compelled to give a tip of the hat to our senior researchers who think nothing of hopping on planes to far corners of the world, literally risking the worst in their quest for opportunities ahead of the crowd.

What compels me this week was a trip to Colombia Louis James of our International Speculator just returned from. Accompanied by heavy security, he walked the ground on a new discovery with the credible potential to host five million high-grade ounces of gold, and maybe more.

While the armed escort is still advisable in those parts, it is increasingly becoming less so and is mostly just a holdover from the bad old days of the 1990s at this point. Back then, the area Louis visited was bristling with guerillas and out-of-control paramilitary groups who, some say, were even worse. Today it’s peaceful, and the locals couldn’t be happier to see a new gold rush. Colombia has a truly fabled history in gold mining, and it is now politically stable and pro-business – perhaps the most pro-business country in South America. This has led to big profits for investors in successful junior gold explorers (the company Louis visited saw its share price shoot up 104.5% in two days).

Louis will report on the opportunities he found on his trip to Colombia in the next issue of the International Speculator. You can learn more by clicking here.

There is much opportunity, even in challenging markets… but sometimes nothing but putting your boots on the ground will do. And for being ever willing to do that, my hats off to the tireless team!

21 Economic Models Explained

(Thanks to our regular correspondent and longtime friend, “the General,” for sending this along. Sorry if this gores anyone’s ox… or, cow, such as the case may be.)

SOCIALISM
You have 2 cows.
You give one to your neighbor.

COMMUNISM
You have 2 cows.
The State takes both and gives you some milk.

FASCISM
You have 2 cows.
The State takes both and sells you some milk.

NAZISM
You have 2 cows.
The State takes both and shoots you.

BUREAUCRATISM
You have 2 cows.
The State takes both, shoots one, milks the other, and then throws the milk
away.

TRADITIONAL CAPITALISM
You have two cows.
You sell one and buy a bull.
Your herd multiplies, and the economy grows.
You sell them and retire on the income.

SURREALISM
You have two giraffes.
The government requires you to take harmonica lessons.

AN AMERICAN CORPORATION
You have two cows.
You sell one and force the other to produce the milk of four cows.
Later, you hire a consultant to analyze why the cow has dropped dead.

ROYAL BANK OF SCOTLAND VENTURE CAPITALISM
You have two cows.
You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows.
The milk rights of the six cows are transferred via an intermediary to a Cayman Island company secretly owned by the majority shareholder, who sells the rights to all seven cows back to your listed company.
The annual report says the company owns eight cows, with an option on one more. You sell one cow to buy a new president of the United States, leaving you with nine cows.
No balance sheet provided with the release.
The public then buys your bull.

A FRENCH CORPORATION
You have two cows.
You go on strike, organize a riot, and block the roads, because you want three cows.

A JAPANESE CORPORATION
You have two cows.
You redesign them so they are one-tenth the size of an ordinary cow and produce twenty times the milk.
You then create a clever cow cartoon image called “Cowkimon” and market it worldwide.

A GERMAN CORPORATION
You have two cows.
You reengineer them so they live for 100 years, eat once a month, and milk themselves.

AN ITALIAN CORPORATION
You have two cows, but you don’t know where they are.
You decide to have lunch.

A RUSSIAN CORPORATION
You have two cows.
You count them and learn you have five cows.
You count them again and learn you have 42 cows. You count them again and learn you have 2 cows.
You stop counting cows and open another bottle of vodka.

A SWISS CORPORATION
You have 5,000 cows. None of them belong to you.
You charge the owners for storing them.

A CHINESE CORPORATION
You have two cows.
You have 300 people milking them.
You claim that you have full employment and high bovine productivity.
You arrest the newsman who reported the real situation.

AN INDIAN CORPORATION
You have two cows.
You worship them.

A BRITISH CORPORATION
You have two cows.
Both are mad.

AN IRAQI CORPORATION
Everyone thinks you have lots of cows.
You tell them that you have none.
No one believes you, so they bomb the crap out of you and invade your country.
You still have no cows, but at least you are now a democracy.

AN AUSTRALIAN CORPORATION
You have two cows.
Business seems pretty good.
You close the office and go for a few beers to celebrate.

A NEW ZEALAND CORPORATION
You have two cows.
The one on the left looks very attractive.

Promoting Free Market Economics…

By Louis James

As you may recall, Doug Casey joined me in my yearly teaching sabbatical in Eastern Europe last summer (click here for last August’s report on how it went). It was a smashing success, and the students had such a good time learning about free enterprise and entrepreneurship, most of them are returning this year and bringing friends. The result is a record group of students – about 90 – who will come to learn more about rational economics, creating businesses, investing, and more, at what we now are proud to be able to call the first Casey Youth Conference on Liberty and Entrepreneurship (CYCLE), to be held from June 29 to July 5, in beautiful Trakai, Lithuania.

This year, they’ll have to write a complete business plan to complete the course – we’re excited. The students are as well and are building a web site for CYCLE. It’s still in beta-testing as we go to press, but you can try it here: CYCLE.

Doug sees CYCLE as one of the most cost-effective ways to teach young people about free-market economics, and better yet, to enable them to join the producers and creators in the world who make progress possible. Eastern Europeans have living memory of soul-crushing communism, and they are hungry for this sort of learning – it’s a great environment. In fact, if you have college-age children who would like to join in, drop us a line at feedback@caseyresearch.com, and we may be able to squeeze in a few who can pay their own way.

When we wrote about this last summer, several subscribers wrote to ask how they could help. One simple way to do this is to make a tax-deductible contribution to the same non-profit we are working with to run our CYCLE program. That’s the International Society for Individual Liberty (ISIL), a 501(c)(3) tax-exempt organization. Doug generally believes most charities aren’t worth the dynamite it would take to blow them up, but CYCLE is an educational investment with potentially near- to mid-term returns. And if you’re going to pay for something, it’s nice to be able to take half that money out of the government’s pockets in order to do so. To pitch in, click here for ISIL’s secure donation page or call ISIL directly at 707-746-8796 and tell them you’d like to support CYCLE.

The programs is very cost effective – about $150 per student (they pay part of the cost) – but there are a lot of students this year, so CYCLE could use your help. Thanks!

Miscellany

More Casey Phyles Starting Up. If you are interested in meeting up and sharing notes with other Casey subscribers, this week we received indications of interest from individuals in the following locales. South Africa, New York (Manhattan), Massachusetts, South Carolina, France and Chicago. If you are in any of those places and want to be connected, drop us a note at phyles@CaseyResearch.com.
Poker, Anyone? Our own Doug Casey, who is known to enjoy a game or two of cards now and again, forwarded me an article from the Wall Street Journal about a grab by the Feds of 27,000 bank accounts totaling $34 million. The sole rationale for the grab was that the miscreants apparently had the gall to enjoy playing poker online. What’s next? Users of online adult sites pop to mind. Then what? The slippery slope gets more slippery by the day. You can read the full article here.
IMF Gold Sales. This just in from our Washington correspondent, Don Grove, who is keeping a sharp eye on the proposed vote to allow the IMF to sell on the order of 13,000,000 ounces of gold (to the Chinese).
The Daily Room Thing… Thanks to all of you who weighed in on the idea of converting this letter from a weekly to a daily room. The vote came in slightly in favor of keeping this a weekly. Even so, I think we’ll try going daily for awhile (but not until a couple of weeks from now.) For one thing, there is so much that I could, and even should, be addressing that trying to cram it into one issue at the end of the week is impossible.

Currently, I think that we would segment the daily room (name still not decided), by major topic areas. For instance, commodities, energy, equities, the economy and, of course, politics (with some miscellaneous scattered throughout). We would then focus on those major sectors on the same day each week. Thus, if energy was not of interest to you, you could just skip Tuesday, for instance. In this way, we could focus our research a bit more on what’s important in each of these key areas, while keeping the segments shorter. For fans of the weekly version, at the end of the week, we could do a round-up edition.

Hate the idea? Like it? All input always welcomed at david@caseyresearch.com (though I apologize profusely for being a poor correspondent of late. While I have read all of your emails, I just haven’t had the time to respond.)

Speaking of The Room… this week is my wife’s much-deserved annual road trip, a wonderful week during which I play full-time father and relearn to appreciate what it’s like to manage a household 24/7. If history is any guide, the week will start out with a fair amount of chaos but eventually settle into something resembling order. In any event, Casey Research CEO Olivier Garret has gallantly offered to step in and write The Room next week, while I concentrate on the simple things – like not burning down the house with that new wood-burning tool I bought the kids.

As I sign off, I see that the stock market is just barely keeping its lips above the water line. I continue to believe that a big wave is about to change things, and fairly soon. There are now so many new and existing negatives looming over the market that it can’t be overly long before Mr. Market runs for cover. Among the things to watch for is a surge in commercial mortgage defaults, which are anticipated to almost double from recent months, to some 4.1% of the total outstanding.

(In The Casey Report, we are currently shorting two especially ripe commercial real estate companies… you can, too… details here.)

Then there is the pending wave of Option ARM resets, which will hit later this summer and then soar into next year.

And there is the soon-to-be-widely-reported-on smack up the side of the head to mortgage originations, caused by the recent 75 to 100 basis point jump in mortgage rates.. a jump that occurred over the period of a week and a half. Speaking with insiders in the banking business who shall be unnamed, I learned that the rate increase caused mortgage originations to hit the proverbial wall. Full stop. While the punditry has begun to comment on the likely impact of the jump in rates, when the full extent of the impact becomes apparent in the weeks ahead, it will send a signal that Mr. Market will surely not appreciate.

Rates are going up, and we are positioning ourselves to take full advantage in The Casey Report.

Meanwhile, U.S. exports continue to fall, Treasuries continue to come under pressure as Russia and other countries announce they are going to invest in IMF paper vs. that of the U.S.

And one more thing, especially interesting, that came my way via Steve H. It is about a meeting on June 16 by senior officials of the BRIC nations, in a remote mountain resort in Russia. The concern is that they are working on plans to replace the U.S. dollar as the world’s reserve currency.

Start by watching this somewhat odd video linked here…

The presenter comes across as something of an odd duck, and so I asked Steve (who is a very successful money manager and a very solid guy) if the guy was credible. Here’s his response:

www.comdig.com

www.deanlebaron.com

www.leadership.gather.com

So, I did a bit of looking around and found this reference on the pending meeting, from the Beijing Review.

Now, it is a bit of a leap to think that this meeting will indeed amount to a Bretton Woods II, but without the U.S. in the room… you can bet the dollar will be on the agenda.

Interesting times, indeed.

And with that, I must run… I think I smell smoke.

Until the week after next, thank you for reading and for being a subscriber to a Casey Research service.

David Galland
Managing Director
Casey Research, LLC.

The Room – 05/22/2009

David Galland — Fri, 22 May 2009 17:57:00 GMT

A dose of sanity returned to the markets this week, starting with cracks beginning to show in the U.S. dollar. Consequently gold, the not-so-barbaric relic, seems to be attracting an awful lot of attention. Instead of falling, as so many pundits have been predicting it should, it has begun to string together a number of impressive up days. Another run at $1,000 in the weeks just ahead is not out of the question.

Also this week, the U.S. stock market hit a pothole on the road to Happy Days Again, helped along, apparently, by massive selling by corporate insiders...

"...in the last couple weeks, company chief executives and chief financial officers have gone from big buyers to heavy sellers. According to InsiderScore.com, two weeks ago there was a slight bias towards selling, while last week turned in the biggest disparity of sellers to buyers — more than 1.2 sellers for every buyer — since September." (WSJ)
In addition, the chart for long-dated U.S. Treasury bonds this week – shown here – resembles a steep cliff. It appears that the U.S. Treasury Department's irrational exuberance for every bailout program that lands on its desk is finally beginning to raise doubts about the government's ability to repay its many obligations. Ahead of us on the curve, the sovereign debt of the UK is thought to be a tea cozy away from being downgraded from the AAA status normally assigned to a respectable country's sovereign debt.

While no one likes to be the bearer of bad news, this week's market action is a welcome confirmation that just maybe we haven't lost our minds here at Casey Research. I can't begin to recount the number of times I woke up in the morning wondering if we were missing something really, really big regarding the current crisis. After all, both the dollar and the stock market have held up remarkably well in the face of what appears to be irrefutable evidence that the U.S. currency and economy are now racing down the fast track to a devastating collision with the reality that there is no such thing as a free lunch.

Despite many opinions to the contrary, the government cannot "fix" an economy as massively broken as ours. At least the fixing involves throwing out some magic combination of regulations, jawboning, newly created money, and backroom deals with fiscally irresponsible and financially bankrupt cronies.

We are, I would opine, at the crossroads of a new paradigm in American history. We have to be, because the path we have recently traveled to get here has been wiped out by an avalanche of bad policy and institutionalized self-dealing on a biblical scale. We are not going back to the bubble years anytime soon, any more than the Japanese have or will in our lifetimes.

That is not to say that America is doomed or that we should begin eyeing the ground for roots and berries. Rather, the citizenry of this nation – and the world, for that matter – are going to have to adapt their personal outlook to the way things are, and not the way network television has portrayed them these many years. Not everyone is going to have a new car every couple of years.

Of course, it's going to take awhile for this notion to sink in. Humankind, and Americans in particular, are forever looking forward to a bigger and brighter future. To the extent that said view of the future includes ever larger high-definition TVs, the latest gadgets, and an ATV parked in the backyard right next to the trampoline and above-ground pool, expectations will have to change. Probably in conjunction with the simultaneous receipt of one's first unemployment check and one's first unpayable credit card bill.

Illuminating these post-apocalyptic thoughts, just below is the text of an e-mail I received yesterday from Dominick, a valued subscriber and correspondent of some duration.

I heard an interview on National Public Radio this week with a bunch of graduates from the college class of 2009. They universally lamented the fact that there were no jobs of any description available. Experts and various callers chimed in with their suggestions for the unlucky class. One graduate with a degree in nursing complained that contrary to expectations, there were no nursing jobs on Long Island where she lived. Apparently a lot of the hospitals in the area have closed or are closing. One caller helpfully suggested that she might want to move to another part of the country where nurses were still in demand. Her reply was along the lines of "No way," and that it wasn't fair. In other words, she was entitled to her job exactly where she wanted it.

These attitudes, too, will be changing in the weeks and months ahead.

There was a day, albeit a day long ago, where Americans were far more adventurous and willing to take on risk than they are today. They were also, if the need arose, willing to roll up the sleeves and put in a hard day's work. None of that spirit was in evidence among the callers to this particular program, whose default mode seemed to be to take a job with government and/or move back in with their parents.

So, how are the coddled generations going to cope with the world as it is, as opposed to the world they want it to be?

We are going to probe deeply into that, and a number of related topics, in the upcoming edition of The Casey Report, which will include an interview with Neil Howe, the author of Generations and The Fourth Turning (among many other works on generation research). Meanwhile, I have some general thoughts...

A continued resurgence of socialism. Socialism is really just a softer-looking form of communism. Few people will go so far to suggest that they are active communists these days. But if you properly phrase the question, I suspect that a majority of young Americans, and maybe a wide majority, are socialist in attitude. Many would even overtly identify themselves as a believer in that form of collective, a clear sign of societal amnesia, given all the lessons that history has provided about that system's shortfalls. Consequently, the world will set about relearning the lesson that you cannot build a productive society by punishing the productive elements of society. Joe Biden's public retort when a woman asked him what she should tell her friends who were unhappy about having their taxes raised, was, "It's time to be patriotic, that's what you say to them."

Watch this clip of then-candidate Biden defending this point of view, and see if you can spot the direct correlation between his words and the concept Marx expressed in his "from each according to his abilities, to each according to their needs."

Also note the obvious passion he brings to the topic. This is not simply campaign jargonizing but a deeply held conviction.

I may be hoping for too much, but I wish that Americans of any income range would be able to look past their personal bias to spot the clear fallacy of this approach. Strictly speaking from a fairness perspective, it wasn't the business owner, successful or otherwise, who led us into this dead end – it was the government and the many special-interest groups firmly latched to the teats of that government. To get a bit metaphoric, it wasn't the fellow owning a chain of dry cleaners who drained the well of American wealth and then replaced the water of enterprise with quick-hardening cement. Again, that would be the U.S. government.

And yet, according to Biden et al., the patriotic thing to do is to take your hard-earned money and give it to the government to give to the needy, whose ranks are currently swollen with the bumbling executives of Goldman Sachs, Bank of America, JPMorgan, and similar Wall Street institutions.

But those comments are based on the notion of fairness. Let's forget fairness for a moment. Forget that letting the Bush tax cuts expire already amounts to the largest tax increase in history, and let's get entirely practical.

Who does the public think is ultimately going to do the heavy lifting needed to bring the economy back into some sort of equilibrium?

As I don't need to tell you, it will not be the government. Thus, every new tax and regulation or insane government dictate simply add more bricks to the wall that entrepreneurs must climb in an attempt to build a sustainable economic recovery.

Which brings me to a second prediction -- the creation of a new wave of quasi-state companies. If you like Freddie Mac and Fannie Mae, then you'll like the new wave of Franken-businesses that will morph out of enterprises that the government decides are too important to fail. Need to prop up a unionized car company? No problem. Just have the USG take a lot of taxes from unpatriotic taxpayers and hand them over to the "new and improved" car companies – companies that are building the next generation of cars, whether people like them or not. For a picture of what's coming, look no further than Amtrak, which has shown an unblemished track record of almost 40 years of losing money. The losses are now exceeding $1 billion a year.

To quote Amtrak's February 2009 independent auditors report...

The Company has a history of substantial operating losses and is dependent upon substantial Federal government subsidies to sustain its operations. There are currently no Federal government subsidies appropriated for any period subsequent to the fiscal year ending September 30, 2009 ("fiscal year 2009") as discussed in Note 2 to the financial statements. Without such subsidies, Amtrak will not be able to continue to operate in its current form and significant operating changes, restructuring or bankruptcy may occur. Such changes or restructuring would likely result in asset impairments.
So, what does the government propose? To build a series of high-speed bullet trains to crisscross the country.

I could go on, but I'm a little short on time this morning, given that Doug Casey and all of our senior editors and staff are gathering at the office here today for a rare in-person management meeting.

Before I rush on, however, I would like to underscore the point I am trying to make, because I think it's an important point. At this stage of the crisis, the government is doing almost everything exactly wrong, the exact opposite of what they should be doing. And the public, correctly scared as they are of the dark and threatening skies overhead, are scurrying under the government's hastily constructed tent.

We shall come out of this just fine -- though we won't come out of this anytime soon, unless there is a 180° shift in government policy, the sort of shift that traditionally only occurs as a result of a popular uprising of strong emotions, expressed eventually at the ballot box. Since the majority of the emotions now swirling around are very much oriented towards more, not less government, we are nowhere near the end of this thing.

As investors, therefore, that is how you have to rig your portfolio -- and that is how we are rigging the portfolio recommendations made in our various letters.

For a final word on the subject of where we are in the economy, I would like to turn the platform over to Howard Davidowitz, the outspoken chairman of Davidowitz & Associates, a company that provides strategic consulting to the retail industry.

What Davidowitz is currently telling his clients, and what he'll tell you in the video clip you can view here, is best summed up in his comment, "If the consumer isn't petrified, he or she is a damn fool."

Crime Scene

As a matter of personal taste, not policy, no one in our household watches network television anymore -- with the exception of Survivor, which never fails to entertain by celebrating humankind's remarkable capacity for self-delusion. Even so, when watching that program, one is forced to sit through trailers for an apparently very popular genre these days -- grisly "true life" police dramas, including any number of geographical derivations of something called Crime Scene Investigation, conveniently abbreviated to CSI. The trailers alone are sufficiently gruesome, but I warn the kids to avert their eyes, which they do willingly.

This week anyone paying attention would have seen a real-life crime scene every bit as gruesome. A U.S. House of Representatives committee passed new greenhouse gas legislation, legislation that includes a cap-and-trade system.

If it were socially acceptable to swear in print in polite company, I would do so right now. Instead, I will express my continued belief -- though maybe it is just a forlorn hope -- that there is no way cap-and-trade legislation can make it into law at this point in time (hopefully at no point in time, but especially at this point in time).

Even so, it boggles the mind that, with everything else going on, the government would spend any time at all on this issue just now. So why are they? A couple of reasons...

First, thanks to a misplaced road sign, over the past couple of decades, millions of young people mistakenly wandered onto the path of "environmental remediation" and related academic pursuits, versus something far more useful and productive. This despite the fact that the world has never been cleaner and is clearly on the trend to get cleaner still.

How did this massive misallocation of time and resources come about? I have read a defensible argument that the entire green movement, which initially cropped up in Germany in the 1970s, was funded by the Soviet Union as a clever attack on the underbelly of capitalism. Given academia's natural attraction to socialism – the attraction to a worldview that seeks to bring down businesses based on the inevitable waste that they must produce in their production processes – it is understandable. But this is a topic for another day.

However, there is something more to the rushed passage of this latest round of government meddling in the affairs of business here in the U.S. It is, if you believe the polls – or just your common sense – that the average American is ignorant of exactly what "cap and trade" actually means. And I quote...

In other words, if the Democratic leadership is going to make good on its promises to its many environmentally oriented supporters, it's going to have to do so pretty darn quickly. At some point the public at large will catch on to the crime that is about to be committed through the cap-and-trade legislation. Under the best of circumstances, it will be a huge waste of time and resources. Under even moderately bad circumstances, it will result in further hardship and taxes dumped onto the back of American enterprise.

There is something else pushing Congress from behind on this issue: a massive lobbying effort by "rent seekers," who are now well positioned to earn big profits from this legislation. Below is a link to a very informative article from the Wall Street Journal. While the author, Bjorn Lomborg, is a fairly rabid socialist himself, I give him credit for at least being honest in his critical analysis of his colleagues in the environmental movement. You can, and should, read his competently constructed critique of the goings-on at the World Business Summit on Climate Change in Copenhagen that is opening this weekend.

As you will read, what is happening behind the scenes is not just shameful but, in my view, a criminal fraud.

Read Lomborg's article, The Climate-Industrial Complex here.

Just So You Know

This week, Treasury Secretary Timothy Geithner, concerned about talk that the U.S. government could lose its AAA bond rating, clarified his goal for government deficits in the years just ahead.

Just so you know, the government expects the deficit to be about 13% of GDP in fiscal year 2009. As we see it, that understates reality by a wide margin. The actual number is likely to be closer to 18%, or $2.5 trillion.

For fiscal 2010, Geithner forecasts the deficit will drop to 8.5%, or about $1.17 trillion. If the government's projections are as far off next year as they are this year, the actual 2010 deficit would ring in at about $1.6 trillion, or about 11.5% of GDP.

For fiscal 2011, the deficit according to Geithner will fall to 6% of GDP, or $840 million. But again, applying the same margin of error for the forecast as we expect to see this year would put that number at about 1.15 trillion. That's still almost three times the prior record of $436 billion, set by George Bush in 2008.

Of course I can't help but comment that the government is out of touch with the reality it is creating with its out-of-control spending, and that the vast majority of the money is going down a rat hole. But it is also important to try and look past the blunt numbers to some of the consequences of this fiscal insanity.

For instance, taking as our starting point the current U.S. debt of $11.3 trillion and adding in the projected additional deficits just discussed, the country will end fiscal year 2011 with a total debt of $16.5 trillion, or about 46% higher than it is today.

That would mean total federal debt would be about 120% of total GDP. That's almost exactly the previous record set in the concluding years of World War II.

One of many tangible consequences of this accumulated debt will be a staggering burden of interest payments. At just 4%, the government would be forced to pay on the order of $660 billion per year in interest payments.

But what happens when interest rates rise to 10%, let alone the 20% Doug Casey feels they are headed for? While it's hard to get one's mind around the latter number just now, the former is certainly within the realm of possibility, given the current trend.

So, how does the government cover $1.65 trillion in annual interest payments?

The answer is, it doesn't.

All of which is to say that we are racing toward a situation where the government will have absolutely no other choice besides massive inflation or an outright default. The stirrings this week suggest that Mr. Market is starting to come to the same conclusion. That means he will also come to the conclusion that interest rates must go up -- either to offset the pending inflation or to compensate for the growing risk of a default.

I'm sure economists have some fancy term for this situation, but vicious cycle will suffice for now.

By the time the politicians stop dithering around with the deck chairs, the ship of state will have sunk, with the survivors clinging to the wreckage. It is our intention – in fact more than that, it is our firm goal -- to make sure our subscribers have a comfortable seat in the lifeboats.

I am not kidding or being disingenuous when I tell you that there has never been a better time to be a subscriber to our various publications. The problem, of course, is that we have quite a few of them, and each is geared to helping you to manage various subsets of market opportunities. For gold and other natural resources, the go-to publications are BIG GOLD, the International Speculator and Casey Investment Alert. For energy, it's Casey Energy Opportunities and Casey Energy Confidential. Overall portfolio strategies, which include plays on rising interest rates, are covered by The Casey Report. And for strategically designed options and futures trades, look no further than the Casey Trend Trader.

Any one of these publications can be instrumental in helping you make it through the shipwreck just ahead, but all of them combined will get you through it in especially fine style. To that end, we are now working on a new membership organization called Casey's Club. It allows you to subscribe to all of our publications and alert services with one low initiation fee... and receive all of them, as well as any services we'll launch in the future, for as long as they are published.

The final details are being worked out now. We'll have more on this first-ever Casey lifetime offer soon.

Tar Baby

I will confess to a strong dislike for fundamentalist religions that advocate as part of their daily ritual the murder of innocents or the suppression of women. Thus, I have zero sympathy for the Taliban or similar groups now being chased around Pakistan, Afghanistan, or other corners of the Middle East.

Anyone who chooses to live by the sword is welcome, as far as I'm concerned, to die by the sword.

Unfortunately, the U.S. seems to be the only country that wants to wield the sword with which they will be smote. Is it because we are somehow more righteous than other nations? Is it that it's our destiny to police the world and to make it over in our own image? Or is it something else, perhaps an overriding and possibly even delusional sense of specialness made ever more acute by the world's largest military budget?

Who knows, maybe it's that Israel – a nation whose neighborhood keeps its back against the wall constantly – has for many decades proven effective at lobbying American congressmen for their undying support. That is not an anti-Semitic remark but a verifiable fact. I don't blame the Israelis for manipulating U.S. policy -- if I were in their position, I would do exactly the same. Instead, I blame the systematic weaknesses within the United States government that allow it to be so readily manipulated.

Regardless, as a result of the normal quirks and accidents of history, we have arrived at a place where U.S. boots are once again firmly planted on the ground in an unwinnable war halfway across the globe. Just as we replaced the French in Vietnam, we have now replaced the Ottoman Turks in Iraq and the Soviets in Afghanistan.

Consequently, even with the more "enlightened" Obama in office, the military budget for the wars in Iraq and Afghanistan is again being ratcheted up. The Senate will pass a funding bill of over $91 billion this week to cover the costs of fighting those wars.

Tellingly, by the end of this year, it is expected that there will be more than twice as many U.S. soldiers in Afghanistan as there were at the end of 2008. The cost of the Afghan adventure will in 2009 exceed that of the battle in Iraq.

As with the antagonist in Uncle Remus' famous parable, we are now well engaged in attacking the tar baby. I suspect the results will be much the same.

Confidence Inspiring 101

I'll admit that I am something of an Anglophile, enjoying as I always have some of the British traditions such as complete British breakfast, afternoon tea, British humor, and a pint of Boddingtons over a game of snooker.

But I do have to wonder whether someone has been slipping something into the warm beer of the British public lately, with a double dose for members of the government over the past decade or so.

There are too many signs of mass insanity to ignore this point, starting with the willing adoption of some of the world's most egregious and intrusive surveillance policies, followed by a rush towards monetary self-mutilation.

For the latest example, the UK Treasury refused to provide the results of the stress tests it had put its banks through. Rationalizing this refusal, the UK Treasury commented that publishing the information could increase instability and result in the government having to undertake even further measures to shore up that country's financial system.

How's that for confidence inspiring?

It shows just how foolish the British have become in dealing with such matters. All they had to do was follow the lead of the U.S. Treasury Department and simply come up with a poorly crafted but well-delivered set of outrageous lies about banks' solvency!

I mean, really old chaps, you can do better.

Random Thoughts

I'm running out of time, well before I run out of topics. So I'm going to go a little wild here, with some quick observations...

On Gold... Everyone seems to like gold these days, including top-performing hedge fund manager John Paulson. The majority of his holdings are now invested in all things gold. Here are his current top portfolio holdings:

Top 15 Holdings (by % of portfolio)

SPDR Gold Trust (GLD): 30.37% of portfolio
Wyeth (WYE): 13.96% of portfolio
Rohm & Haas (ROH): 13.44% of portfolio
Boston Scientific (BSX): 8.4% of portfolio
Gold Miners ETF (GDX): 6.81% of portfolio
Kinross Gold (KGC): 5.87% of portfolio
Philip Morris International (PM): 3.42% of portfolio
Petro-Canada (PCZ): 2.96% of portfolio
Schering Plough (SGP): 2.26% of portfolio
Mirant (MIR): 2.22% of portfolio
Gold Fields (GFI): 2.21% of portfolio
JPMorgan Chase (JPM): 1.65% of portfolio
AngloGold Ashanti (AU): 1.15% of portfolio
St Jude Medical (STJ): 0.91% of portfolio
Embarq (EQ): 0.81% of portfolio

The Russians Also Like Gold. "MOSCOW, May 21 (Reuters) - Russia's precious metals and gems repository plans to quadruple gold purchases this year to about 3 percent of national output to help miners survive the economic slowdown, a source within the organisation said on Thursday. The repository, known as Gokhran, plans to buy 5 tonnes (160,754 ounces) of gold from about 15 enterprises this year, up from 1.2 tonnes in 2008, the source told Reuters on condition of anonymity.

"...Gokhran was founded in 1920 with the aim of centralising and storing Russia's supplies of precious metals and gems. Today, the body is subordinate to the Finance Ministry and its total reserves are a state secret."

The Chinese Don't Like Dollars. This week the Chinese and the Brazilians began working in earnest on a new regime that would allow each country to use each other's currency in intrastate trade, bypassing the U.S. dollar. Actions speak louder than words, and the Chinese have been saying a lot with their actions of late.

Pension Benefit Guaranty Corp – Next Up for Bankruptcy, I Mean, Bailout. According to our own Bud Conrad, PBGC, the government entity that guarantees the pensions of some 44 million Americans, is in deep trouble. You can read this story of epic self-dealing by America's favorite investment banks and its government stooges by following this link...

Tech Talk

A software that I find particularly useful, is SnagIt (learn more here). It allows you to very easily capture any image on a computer screen and then paste it into another document. For those of you who like to blog, SnagIt is an essential tool.

The following came in from subscriber Steve H. While I haven't personally had a chance to try out the software yet, I plan on it...

jott.com

Do you have a technology you like to share with others? Or any comments at all about this edition of The Room? If so, send them my way at David@CaseyResearch.com.

Miscellany

Oil Spills? Bring ‘em On... Check this out.

A bit of British Humor. A moment ago, I mentioned my fondness for British humor. Follow this link to a car review from a British newspaper, hands down the funniest car review I have ever read.

Joe Cocker. A subscriber this week reminded me of Joe Cocker, an artist whose name is largely faded from memory, but who was certainly unique in his time. You can view a funny "translation" of Joe's wild performance at Woodstock by pasting this url into your browser window: http://www.elwp.com/Joe%20Cocker.html. Viewing that video made me wonder, "Whatever happened to Joe Cocker?" Thanks to the miracle of the Internet, I found that he is still alive and well and maybe even coming to a town near you soon. Check out his rather fancy website here, http://www.cocker.com/.

And that, dear readers, is that for this week. Even though I started well before the crack of dawn, I am now running late and ready to sign off. A quick glance at the screens tells me that the Dow is up 26 points and gold is holding steady at $957 per ounce.

Until next week... thanks for reading and for being a subscriber to a Casey Research publication.

As dire as the outlook may be, quoting Joe Cocker, together we'll get through all of this, "With a little help from our friends."

David Galland
Managing Director
Casey Research, LLC.

The Room – 04/17/2009

David Galland — Fri, 17 Apr 2009 15:22:00 GMT

Dear Reader,

Being new to a profession is always a challenge. The neophyte wants to impress his superiors, but lacking experience, is left to rely upon what natural skills he possesses. And, often, will try to make up for any shortcomings in specific skills by displaying a double dose of enthusiasm and energy.

Our new president, for example, has a great many skills related to successful politicking, but none at all specifically related to the task of being president of the world's most powerful country. This is not a job that one can prepare for.

And so We the People, his new bosses, are left to observe Obama leaning heavily on his considerable political skills – and his obvious energy – in an attempt to impress.

He is trying to do so through a constant stream of new pronouncements emanating from the White House, or wherever Mr. Obama happens to be standing at the moment. On one day he wishes to put an end to nuclear weapons, on the next to reach an accommodation with the Iranians. While he’s at it, he'll be (maybe) pulling the troops out of Iraq, but redeploying them into Afghanistan and maybe even Pakistan.

Hopping on Air Force One to bask in foreign adulation, he might close the afternoon by announcing he’s going to rescue the indebted mortgagees while dealing with bank insolvency. With hardly time for a deep breath, we see commitments to salvage the U.S. car industry -- but without overly inconveniencing its unionized workers -- followed by a promise to tackle the thorny question of immigration. Over afternoon tea or perhaps a Seder supper, he pronounces that help is on the way for Mexico in its “war” with its drug gangs, then over breakfast dedicates himself to assembling an “armada of allies” to wipe the earth clean of Somali pirates.

Worried that those initiatives may fail to impress, Obama’s administration then treats us to news that it will reform the tax code (if only to tighten the weave of the net) and close down the world's "tax havens." Further, before this December, if the Obamites have their way, carbon emissions in the United States will be smashed down to the levels of 50 years ago (which is to say that what is left of American manufacturing will soon become Indian or Chinese manufacturing). In support of that goal, a comprehensive cap-and-trade program will be initiated, invoking tens of billions of dollars in new taxes on American enterprises each year.

While I have the chronology wrong, the actual list of initiatives proposed so far by the energetic Obama is correct, though not complete. In fact, the list goes on and on… and expands even as I write: with the administration’s encouragement, the EPA is set to declare carbon dioxide -- you know, the stuff that makes plants grow -- a threat to public health.

In any event, the point I am trying to make, other than to offer President Obama a kindly word of advice that maybe he should take a deep breath and pause in his many exertions, is that rather than impressing, he is increasingly at risk of blowing all of his considerable store of political capital and going down in the history books as something of a failure.

There is a saying in marketing that I've always found true, and I think it is very appropriate in this instance. Namely, "The more you emphasize everything, the less you emphasize anything."

I, for one, am getting dizzy from watching Mr. Obama's antics and trying to understand exactly what he’s looking to accomplish, other than endeavoring to impart the impression that he’s accomplishing a lot. But there is a big difference between creating an impression and actually delivering the goods.

Sooner rather than later, I suspect, Congressional Democrats -- looking just over the horizon at the next election -- will realize that not only is the economy on tilt but so perhaps is their president, at which point he will be forced to begin a program of massive backpedaling with serious consequences to his credibility.

For those of you who are supporters of Mr. Obama and hoping for the best from his administration, now might be a good time to drop him an email suggesting he might wish to rein in his goals before spinning into oblivion. For those of you who don't particularly care for Mr. Obama, at the pace things are going, I think you’ll find your worst fears about the ambitious president will remain unrealized.

Alternatively, finding himself all of a sudden at risk of becoming marginalized and being fired at the end of his four-year probation period, Mr. Obama might take a serious gamble to regain his relevance – a war with Pakistan? While one can only hope not, stranger things have happened.

Why Do You Buy Gold?

As you can see from the chart below, since the latter part of February, the GLD gold ETF has been on a down trend, reflecting the underlying action in gold.

The retracement, while unwelcome, is understandable given the news about persistent deflation in widely followed indices such as the consumer price index. Also pushing things in the wrong direction, there are the U.S. dollar’s recent gains against the euro. And, as discussed here last week, we've also heard that the IMF is going to be dumping a fair bit of gold in its attempt to rebuild its war chest.

Not exactly cheery news for our favorite yellow metal. In fact, in any other than the Bizarro World in which we now live, the chart for GLD would be looking a lot worse than it is. As you can see more clearly in this next chart, the volume in GLD has fallen off quite a bit of late, which is a good proxy for broader interest in gold. Granted, we live in a particularly volatile and unpredictable age, which means anything can and likely will happen on any given day that can change virtually anything or even everything. But the odds are pretty good that absent one of those "shocker" incidents, gold is likely to remain range bound, perhaps even trend lower, until the inflation that has been baked into the cake by the government’s massive infusions of money makes itself known.

Which brings me to a question: Why do you buy gold?

Being clearly able to answer that question is the only way you can intelligently determine both the quantity of gold you ultimately buy and the timing of when you will buy (and eventually sell).

I mention this because on far too many occasions, I have had conversations with individuals, or received emails from subscribers, who view gold with an almost romantic affection. That's a mistake. As Doug Casey recently wrote, it's important not to fall in love with something that cannot love you back.

While gold can backstop your portfolio and place a solid foundation under your net worth, in the final analysis it is simply an asset, albeit one with unique properties that make it an especially attractive form of money.

It’s because of those unique properties that many of you own gold, as a form of insurance against inflation and other forms of monetary mayhem. In our view, that is the most important reason to own gold, especially these days. Viewed through that lens, the latest price setbacks for gold should be of almost no concern, unless you have not purchased your full allocation to the metal -- in which case, beginning to buy on the dips makes sense.

On the other hand, if you're a speculator in gold, your challenge becomes trying to discern gold’s current trading range so that you can buy when it's low and sell when it’s high. Reflecting the extreme volatility that grips almost all markets, gold's trading range these days is fairly wide, roughly between $800 and $1,000.

Frankly, absent a shocker event, I see no reason for gold to break out of that range decisively anytime real soon… at least not until we see the inflation that is the inevitable outcome of the Fed’s determined destruction of the dollar and U.S. government deficits of a magnitude that would bring tears to the eyes even of the late Lord Keynes.

Entourage

As you may have heard, our media star president is heading off to the Summit of the Americas next week to engage in another round of photo opportunities with other politicians.

Given the obvious importance of the event, it is no wonder that he is taking an entourage of over 1,000 important U.S. delegates, including wife Michelle's full-time makeup artist, a presidential first.

So what are the lofty goals of this important summit?

According to the AP…

Obama's priority list for the trip that begins Thursday is stacked with matters of concern across the Western Hemisphere – the crippling recession, the warming of the planet, the trafficking in drugs, the gloom of poverty. Crime, despair and political unrest south of the border can all undermine U.S. interests.
In order to meet and discuss these many challenges, the princely sum of $80 million will be spent by summit organizers, an amount that does not include the staggering sums involved with transporting the Obamas and their entourage to the Caribbean island where the summit will be held.

Not to worry, I am sure that all 1,000 of our delegates are necessary and worth the cost of sending them on their spring break and putting them up in the style they are quickly becoming accustomed to.

Interestingly, as is the case with these highly staged events, the outcome has already been decided and the post-summit agreement already drafted. Again, according to the AP...

The draft summit agreement, negotiated laboriously, speaks broadly about cooperation on climate change, education, safety and prosperity. But it makes no direct mention of the overarching crisis of the time, the global economic swoon. In fact, most of it was negotiated before the crisis hit with full force last fall.
If you excuse me for being a bit of a skeptic, a Grinch even, don't you think this all could have been handled with a couple of conference calls? Because as you and I both know, in the final analysis nothing will come out of this grand holiday other than a noticeable increase in local rum sales.

All of which moves me to ask, is anybody actually keeping a tab on the president's tab? Does no one now occupying the polished corridors of power in Washington understand that the economy is wrecked, and that every dollar counts?

Is anybody out there?

Ed. Note:

Entourage

Opportunity Knocks?

The chart shown here is of the CRB commodities index. A couple of things jump off the page, at least to me. The first is, that was one hell of a slide in commodities prices. The second is that it sure looks like it's trying to put in a bottom.

The contrarian in me tells me that this is a picture of a very interesting opportunity in the making. Again, no guarantees the commodities complex can't go lower, but the simple fact is that people need to eat, to keep the power on, and to actually produce the things necessary for daily life. Thus, looking for opportunities to get intelligently positioned in the commodities complex, with the expectation of a double or better over the next five years (without leverage… with leverage, the returns could be manifold that), seems to make a lot of sense.

Rest assured that in The Casey Report -- and for those of you with a higher net worth and a familiarity with futures and options, the Casey Trend Trader – we will be sharing a variety of strategies to get positioned in this trend.

The Down Low

Upon reading that Homeland Security has issued a report this week warning about the rising threat from "right wing extremist" groups brought to mind a topic I’ve been meaning to comment on for some time.

The topic is simply, armed revolution.

While I doubt their ability to get the specifics right, I suspect the general thesis of the Homeland Security report is probably correct. Namely, that some Americans may be willing to go to the mats should the U.S. government continue to infringe upon their rights, with stronger gun control measures being a likely tripwire.

Supporting that contention, below is an excerpt from an email that someone forwarded to me – not in support of the idea, but rather to show me that there are those willing to entertain the idea of a gun-battles-in-the-street sort of revolution.

(Note: The term "Three Percenters” refers to the 3% of colonialists who, the authors of this email allege, were the minority who actually took up arms against the British in the American Revolution, versus the 97% who were largely just bystanders. In the modern context, it is this 3% who are supposedly ready to grab arms and use them against the government.)

Below is the excerpt… which, as you will read, is inflammatory stuff.

Three Percenters today do not claim that we represent 3% of the American people, although we might. That theory has not yet been tested. We DO claim that we represent at least 3% of American gun owners, which is still a healthy number somewhere in the neighborhood of 3 million people. History, for good or ill, is made by determined minorities. We are one such minority. So too are the current enemies of the Founders' Republic. What remains, then, is the test of will and skill to determine who shall shape the future of our nation.

The Three Percent today are gun owners who will not disarm, will not compromise and will no longer back up at the passage of the next gun control act. Three Percenters say quite explicitly that we will not obey any further circumscription of our traditional liberties and will defend ourselves if attacked. We intend to maintain our God-given natural rights to liberty and property, and that means most especially the right to keep and bear arms. Thus, we are committed to the restoration of the Founders' Republic, and are willing to fight, die and, if forced by any would-be oppressor, to kill in the defense of ourselves and the Constitution that we all took an oath to uphold against enemies foreign and domestic.

We are the people that the collectivists who now control the government should leave alone if they wish to continue unfettered oxygen consumption. We are the Three Percent. Attempt to further oppress us at your peril. To put it bluntly, leave us the hell alone. Or, if you feel froggy, go ahead AND WATCH WHAT HAPPENS.

(As an aside, I’m sure Homeland Security appreciates it when these self-described revolutionaries make their identities well known by sending around broadcast emails.)

Supporting the notion that people are loading up out of concern that the government has designs on their weapons is this citation from Bloomberg…

sales

I can attest to the fact that the local gun store is clearly thriving; it has recently undergone a top-to-bottom renovation in order to more comfortably accommodate its many patrons. The trend toward more gun sales is also evident in the share price of Smith & Wesson (SWHC) over the last six months…

So, it’s not out of the question that the stage may be set for what could turn into a series of confrontations between the government and its harshest critics.

Some random thoughts...

As is true of almost all successful species, it’s human nature to want to group together. This tendency toward the collective is perfectly understandable in that it allows for a more efficient sharing of resources. There are other benefits, including a sharing of the protective duties and chores that would otherwise take an inordinate amount of time and/or resources should each individual be forced to undertake them. While I personally shy away from most forms of collectivization, that so many gravitate toward that condition is easily understood.
Along with this natural desire to collectivize, it is equally natural for an individual or individuals to assume power of the collective, once formed. As often as not, the group encourages and even demands that a particular individual or individuals assume the reins of power. We can all recall the kids who, even in our kindergarten classes, would naturally assume a leadership role and be supported in that role by many.

Perhaps this is related to a subconscious quest for better genes, or simply because most people prefer it when others stronger than themselves take on the responsibility of decision making. Regardless, the tendency to gravitate to power is a clear and present human trait.
Which brings me back to the “Three Percenters.” Imagine, for a moment, the logical outcome if this group were to actually rise up and win the day? In my construct, all this would achieve is that the national collective would replace the current leadership with that of another sort. While I am not any more enamored of the current power elite than I was of the bumblers they replaced, I suspect that I might like living under the rule of the Three Percenters even less.
While I don't doubt that we'll see incidents of violent pushback against the current government, and maybe even something as dramatic and devastating as the Oklahoma bombing (notably carried out by a veteran of Gulf War I), the idea that a group of homegrown revolutionaries could actually outgun our modern army is ludicrous.

There is a significant difference between 1776 and the situation today. Not only does the U.S. government not have to deal with long supply routes, as was the case with the British, but today even the best-equipped gun shop has nothing in stock to remotely compare with the sophisticated armaments the U.S. government has at its disposal, thanks to decades of massive military budgets. When we can take out houses in Peshawar using drones operated by technicians comfortably seated in a Nevada command post, how much trouble, really, will it be to handle a small cadre of malcontents operating in Poughkeepsie?
The danger, therefore, doesn’t come from the outbreak of a guerrilla war here in the U.S. -- although dramatic incidents and perhaps even large-scale riots are almost a certainty over the next 10 years -- but rather from the government’s reaction to these events.

Already, local police are being equipped and trained to view even commonplace crime with a military sensibility. And we have seen a breathtaking degradation in individual liberties in response to the 9/11 attacks.

Of course, this degradation is not apparent to most, other than as modest inconvenience at airports. That’s because most of us will never experience the dire consequences of a negative assessment of our email records and other similar intrusions upon our privacy – picture a door being kicked in in the middle of the night followed by a quick trip to a dark cell. Even so, the fact that the government has been willing to cross previously unimaginable lines in its fight against real and imagined terrorists is a clear indicator that, should domestic disturbances begin to reach anything approaching a regular tempo, the response could be extreme.

So what is one to do? Given humankind's tendency toward collectivization, and for the collective to be controlled by a small power elite that will not generally give up the reins once taken, it seems logical to me that the only sane response that we as individuals who value our individual freedoms can have is to learn the fine art of keeping a low profile. Or, to use modern slang, to keep things on the “down low.”

Put another way, trying to swim against a powerful river, a river that stretches back to the very beginning of human time on this planet, will only wear you down and eventually pull you under.

In my opinion, people should spend a lot less time worrying about the collective and a bit more time thinking about the steps that they can take as an individual to enjoy an excellent life while simultaneously keeping out of harm's way.

To be sure, that might involve eventually coming to the conclusion -- as some Jews did in Germany pre-WWII -- that as warmly as one might feel about their hometown, to remain in place is to risk everything. By the time the sentimentalists were being packed up for camps, the realists had already set up shop in far less dangerous climes.

In the current instance, as much as we may complain about the growing power and meddlesomeness of the U.S. government, most people are able to go through their lives largely unaccosted – saved by the tax man. But that doesn't mean you should be blind to the hard historical evidence that any country, no matter how enlightened it might seem, can and will change... and in some cases, dangerously so.

It is for this reason that my globetrotting partner Doug Casey has long advocated having at least one foot in another country. And by "one foot," I mean some percentage of your assets, ideally some property, and at least a working knowledge of the place and some local connections.

Don't get me wrong, I think the United States of America is a great place, and the odds are good that as bad as things might get, it will remain in solid contention as one of the top five countries in the world in which to reside. But if things took a decided turn for the worse, long before I would even begin to get it into my head to grab up arms, I’d be headed for the nearest international airport.

Having traveled the world extensively, I can say with complete confidence that there are many, many other countries where one can live an exceptional and fulfilling life, even if – or maybe even especially if – you don’t have very much money.

I apologize if this comes across as rambling or disappoints those of you looking only for investment advice, but I think the point is important... the point being that we each have to deal with the realities of where we live, and getting overly heated up serves no real purpose. Sure, join up with your fellows in protesting higher taxes, write your congressman, and make your voice heard – but don't overlook the need to also organize your life in such a way that you generally fly below the radar of the powers-that-be, and so that you can move on to friendlier climes in the unlikely event that becomes a necessity.

Most of all, don't forget to smell the roses.

To quote Robert Friedland speaking at our recent Las Vegas summit, "The situation is hopeless, but it is not serious."

Tax This!

Given that this week encompassed the dastardly date of April 15, I thought at least a passing reference was in order.

To assist in making a reference, I turn to the folks at Reason magazine who have put together a worthwhile short video on the topic, which you can view by clicking here.

Elsewhere, I thought it was interesting to read this week that the governor of Texas publicly pondered the idea of Texans seceding from the union, should the federal government continue its insane tax-and-spend ways. Here's what he had to say on the subject...

"We've got a great union. There's absolutely no reason to dissolve it. But if Washington continues to thumb their nose at the American people, you know, who knows what might come out of that. But Texas is a very unique place, and we're a pretty independent lot to boot," Perry said Wednesday.
And, of course, as I'm sure you have been reading about, there has been an outbreak of anti-tax "tea parties" around the country.

So there's hope. The situation is hopeless, but not serious.

That’s It for This Week!

Before signing off today, I would like to thank all of you who responded to my solicitation last week for feedback on whether the U.S. should sell "economic citizenships." The views I received were roughly split down the middle, with half in favor of a program that offered citizenship in exchange for a significant investment in U.S. real estate, and the other half dead set against anything that would allow more foreigners into the country. Next week, when I have a bit more time, I'll try to share some of the juicier excerpts from both sides of the argument.

As I sign off just after midday on Friday, April 17, I see that the Dow has stalled out and is flat on the day. Given that today's news includes that Citigroup's earnings were stronger than estimated, as well as the profits earned by GE -- I cannot help but take it as a very bad sign for the stock market that it has not managed to mount a further rally.

Meanwhile, gold has fallen again and is now trading at $868 per ounce. It could go lower, but per above, at this stage in the game, with the longer-term fundamentals for gold firmly in place, its short-term price action is of very little real concern.

Until next week, thank you very much for reading and for subscribing to one or more Casey Research services!

Sincerely,

David Galland
Managing Director
Casey Research, LLC.

The Room – 03/27/2009

David Galland — Fri, 27 Mar 2009 15:31:00 GMT

Dear Reader,

The Las Vegas taxi driver was an old fifty-something, with a mullet hanging out of the back of his battered baseball cap and a potato sack gut hanging over his belt. Having driven a cab myself, long ago and far away, I habitually engage in cabbie chat, as I did now.

“So, how’s biz?”

“Horrible. Thanks to Obama, my family’s going to starve!”

“Really?” I asked incredulously, surprised by both the topic and the heat of his response. “How come?”

“Thanks to him trash talkin’ Vegas, we’ve had 110,000 room cancellations. Once the March Madness basketball tournament is over, this place is going to go back to being a ghost town, just like it was last week, and the week before that. My family’s going to starve thanks to Obama!”

“But they’re not actually going to starve, are they?”

“Yeah they are, I’m telling you. Starve, plain and simple. I ain’t making any money as it is, and once town empties out again, I’m going to go broke and my family is going to starve!”

“Wow,” I said, “so, what are you going to do? Move away?”

“Nah,” he said with no hesitation, explaining, “I like it here too much.”

With a quick and puzzled glance at the neon-illuminated cement wasteland through which the cab was speeding, I had a hard time imagining what attraction the place might have.

“What is it about this place you like so much?” So much, apparently, that he was willing to let his family starve in order to stay.

“Well,” he said in an almost professorial tone, “first, I get to see a lot of naked women. Second, I get a lot of ‘freebies’,” he said lustfully, sending a shudder down my spine. Call it rural naivety, but while I can understand that a working girl has to work, I had a hard time getting around the idea that she had to “work” with him. And for what, a free cab ride?

“Finally,” he concluded, “I like the weather. That’s about it.”

As I couldn’t think of anything else to say – at least not without risking offense -- to a man who was apparently comfortable with the idea of letting his family starve so he could continue to ogle, and apparently fondle, the women of this fair-weathered Sodom & Gomorrah, I turned my attention back to the surroundings.

And what surroundings they are. Lavish. Spectacular. Ridiculous. Some day in the future, perhaps 500 years from now, the gilded ruins of this testimony to humankind’s penchant for excess will be picked over and cataloged by archeologists for the benefit of primary school education.

Then again, with the way things are going, it could be just 50 years. I say that because City Centre, the world’s largest construction project, continues to be built on autopilot, even though it’s only about half finished. And this is just one of a number of other hotels and condo towers in a similar circumstance; started in a more optimistic time, but now merely adding to the unsold inventories that have made Las Vegas the epicenter of the real estate meltdown.

The place is in real trouble. Maybe the degenerated taxi driver will hang on, family be damned, but I suspect that an exodus from the place is inevitable. And can a cluster of mysterious large-construction project fires be far behind? (As an aside, if you own any insurance company stocks… run, don’t walk, to the selling window. It’s not just that certain doomed construction projects are likely to become fire hazards, but that insurance companies notoriously invest their capital in real estate and bonds, both of which are dead ducks, or soon will be.)

I am glad I saw Las Vegas when it was still at its prime. Soon, I suspect, it will be something akin to an urban war zone. As for Obama, the next time he gets an urge to take in a show, he might want to give the place a pass.

A Quick Musical Interlude, Then Something Different

I am going to try something different for the rest of this week’s missive, but before I get to that, I want to share a bit of music many of you may recall. But first, a little backgrounder.

A subscriber and new friend, the talented musical producer and film maker, Sadia Sadia, attended our Las Vegas summit and gave me as a gift a copy of Rick Wakeman’s autobiography, “Grumpy Old Rock Star.”

Those who recognize the name will remember Wakeman as the talented organist for the mega-band “Yes”… as well as the composer/performer for a huge body of solo work, including his much-acclaimed Journey to the Centre of the Earth.

While I wouldn’t count myself as a rock groupie and so Wakeman’s name evoked little in the way of recollection, I began to casually peruse his book, which is really just a collection of stories from his wild career, and got sucked right in. It was a big surprise… interesting, well written, and very, very funny.

As is the way with these things, reading the book reignited my interest in his music, and so I quickly stumbled back upon Roundabout by Yes, a forgotten favorite and one of the band’s best-known tunes. You can listen to it here.

(In the video, the guy dressed up in the glittery cape is Wakeman -- as gifted and as hard-living a rock star as has ever graced the stage -- so hard living, in fact, that he had two heart attacks at the age of 25.)

Now, as for the rest of this edition, I’m going to try to tell a story, but using snippets from other sources with, perhaps, a side comment thrown in now and again.

I am taking this approach because, frankly, since hopping on the plane to Las Vegas last week, the sheer volume of proposed new regulations, legislation, and plain idiocy have outstripped my processing abilities. It seems that every hour or two over the past week, there has been a breaking story that has me saying out loud, “What, are you kidding?” Or, “Wow… we’re really in trouble now!”

It came to me as I started writing to you this morning, that these many stories – rather than just random spatters of inanity – together form a distinct pattern. And the pattern seems to point to a new paradigm now materializing here in the U.S. and, by extension, the world.

As I think the following stories demonstrate, the new paradigm is not one any thinking person will embrace.

Eat the Rich

"Prudent investments in education, clean energy, health care and infrastructure were sacrificed for huge tax cuts for the wealthy and well-connected. In the face of these trade-offs, Washington has ignored the squeeze on middle-class families that is making it harder for them to get ahead. There's nothing wrong with making money, but there is something wrong when we allow the playing field to be tilted so far in the favor of so few." (A New Era of Responsibility: Renewing America's Promise. The President's Budget and Fiscal Preview)

One finds many charts in a federal budget, most attributed to such deep mines of data as the Census Bureau or the Bureau of Labor Statistics. The one on page 11 is attributed to "Piketty and Saez."

. . . Thomas Piketty and Emmanuel Saez, French economists, are rock stars of the intellectual left. Their specialty is "earnings inequality" and "wealth concentration."

Messrs. Piketty and Saez have produced the most politically potent squiggle along an axis since Arthur Laffer drew his famous curve on a napkin in the mid-1970s. Laffer's was an economic argument for lowering tax rates for everyone. Piketty-Saez is a moral argument for raising taxes on the rich.

. . . Turn to page five of Mr. Obama's federal budget, and one may read these commentaries on the top 1% datum: "While middle-class families have been playing by the rules, living up to their responsibilities as neighbors and citizens, those at the commanding heights of our economy have not."

"Prudent investments in education, clean energy, health care and infrastructure were sacrificed for huge tax cuts for the wealthy and well-connected."

"There's nothing wrong with making money, but there is something wrong when we allow the playing field to be tilted so far in the favor of so few. . . It's a legacy of irresponsibility, and it is our duty to change it."

(The Obama Rosetta Stone, by Daniel Henninger, from the Wall Street Journal’s Opinion Journal.Com)

Supporters of Capitalism Are Crazy, Says Harvard

everyone knows

that

(

From

Mises Daily

by Thomas E. Woods, Jr. )

Obama's Latest No-Banker-Left-Behind Scheme

(From CounterCurrents.Org)

What’s Not to Support?

David again. With a deal that has the taxpayer lending the boys club 85.7 cents on the dollar, and assuming all risk should the loans failed to be paid back, who wouldn’t provide “support” to Mr. Obama? But at what cost? Well, at better than one trillion more dollars, if things go off the rails – as they almost certainly will. How do you spell dollar? D-O-O-M-E-D.

By the by, click the following link for an exceptionally well done graphic representation of just how much money a trillion dollars is. Call the family around and give it a click (then pass it on)… http://www.pagetutor.com/trillion/index.html

New York Tax Rise on Higher Earners Hinted as Budget Gap Rises

Not So Fast

Remember Wen?

March 23 (Washington Post)

***

March 25 (Bloomberg)

***

March 25 (Bloomberg)

Timothy Geithner

Zhou Xiaochuan

Barack Obama

David again. If these people are the smartest folks in the room, I wonder who’s cooling their heels in the hallway.

We’re from the Government and We’re Here to Help

9:02 p.m.

(Alec MacGillis on the Washington Blogging site commenting on Obama’s online Town Hall meeting)

***

Barack Obama

Paul Volcker

Peter Orszag

David here. But surely Volcker, that old cohort of President Reagan and champion of fiscal conservatism, won’t recommend punishing overseas investment or raising taxes by another $300 billion?

Sadly, you are laboring under a misconception (you’re not alone).

(Real Clear Markets, The Paul Volcker Myth, Feb 2008)

***

(“Paul Volcker Blasts Idea of Permanently Repealing Estate Tax,” Wall Street Journal, January 2003)

***

EPA Greenhouse Gas Declaration May Pressure Congress

General Motors Corp.

American Electric Power Co

David Bookbinder

…

David again. Don’t you love the “Congress can do it all in one shot” comment. And, yes they can. Even mentioning this sort of legislation in the face of all that now challenges the economy is near criminal. Especially in that it is almost certain to chase away the remaining companies that still endeavor to engage in manufacturing in the U.S..

Radio Worth Listening To. Do yourself a favor and find a comfortable seat and click here to listen to this audio interview of Lord Monckton from the G. Gordon Liddy Show. Monckton is one of the most well-informed – and entertaining – commentators on the topic of anthropogenic global warming on the planet.

“Hold the fort,” I can hear some of you saying. Liddy is a hard-core dogmatic. Hardly a balanced perspective. And you are right. While I have met Liddy on several occasions and enjoyed his company, a reading of his book Will indicates that he is far more than dogmatic. Insane is more like it.

But he does a competent job as an interviewer, and Monckton does a brilliant job as an interviewee. You have to sit through some oddish music in the beginning, but it’s worth taking a listen – no matter where you come down on the issue of man’s contribution to global warming.

Worth Watching… Closely

David, still here. In the following article from the Wall Street Journal, I have boldfaced the relevant words. Words have consequences, and the consequences of these words indicate we may be on the path to another ginned-up “conflict” of the “pay no attention to the man behind the curtain” sort. It could also be an early step toward gun control, a topic that many Americans pay close attention to (and, based on history, for good reason).

Here’s the article – as you read it, see if your mind begins to evoke, as mine did, visions of the author running around waving his or her arms at the new and impending “crisis!”…

address the crisis

the full Senate Committee on Homeland Security and Governmental Affairs, also will offer the highest level of attention from Congress on the issue thus far

extra $100 million

targeting the guns and money from inside the U.S

The government is girding for a possible Katrina-style disaster along the 2,000-mile-long Mexican border

Obama Announces Plans for More Funding for Afghan War

(Washington Post)

***

The End of Summer(s)?

The Innovator's Dilemma

(Adrianna Huffington writing in The Huffington Post)

David here. Don’t you love the “our remarkable president” bit of sycophancy? It reminds me of a conversation I had at the Las Vegas summit with a friend of some duration – an interesting and intelligent individual. It started when she told me she had been a big supporter of Obama’s, but now she wasn’t so sure. The conversation went something like this…

“Why were you such a big supporter?” I asked.

“You know, because he was for change,” she replied.

“Sure, but what does that actually mean? What change?”

“Oh, you know, change from the way Bush was handling things,” she said with a certain uncertainty in her voice.

“So, your vote for Obama was really just a vote against Bush’s policies?” I asked, thinking that wasn’t altogether a bad reason.

“Well, no, I don’t think so,” she answered. “There is something else. You see my father was black and my mother was white, like Obama, so I felt a connection.”

“Fair enough,” I commented, “But was that it? I mean, wasn’t there some particular philosophical point that rallied you behind Obama?”

“Well, er, I’m not sure. But I sure am worried about him now.”

I have always found it remarkable how many otherwise reflective people have a hard time expressing why they support one candidate and dislike another… often viscerally. It is, I believe, strong testament to the ability of the campaign team, and the media, to paint a picture that resonates with the target audience… a picture that, while attractive, more often than not completely lacks a tangible foundation.

Americans may not be very good at manufacturing “stuff” these days, but we are whizzes at selling stuff through multi-channel media campaigns, including fine-talking politicians.

As for Summers, I have previously mentioned that Olivier Garret and I heard Summers at a White House conference last year. When it came time for him to speak, he gave a very lucid and even passionate argument for making Bush’s tax rollbacks permanent (for the not irrational reason that to let them expire will amount to one of the largest tax increases in history, an increase that the economy can ill afford at any time, but especially now).

While I don’t have a full grip on Summer’s broader philosophical and academic views of the economy, I took it as encouraging that he was brought onto Team Obama, though from what I have heard since, it seems like he has grooved right in with the statist views now dominating in Washington. But maybe not, and so, per Huffington, expect him to be an early casualty.

“Fusion Centers” Expand Criteria to Identify Militia Members

(FOX News, 3/23/09)

David again. Be afraid… be very, very afraid.

Glimmers of Hope

Gordon Gets a Thrashing

(“General Watson,” friend and occasional Casey Research European correspondent).

David again. Here’s the video… and it is definitely a “must see” -- if you haven’t yet done so, and most of you probably will have, given the amount it is being emailed around. Click here to watch.

Given the amount of play this video has received, there is hope that the media will look to boost their ratings by finding other champions of fiscal sanity and providing them a soap box. Could happen. Probably won’t.

AIG, I Quit!

David again. Another item that has made the rounds this week is the letter of resignation from an AIG employee.

There is so much to the “evil bonus takers” story that the media, falling back on Ye Olde Witche Hunt as a circulation booster, has ignored, either deliberately or just because they are stupid.

The now famous AIG resignation letter sheds some much needed light, so read it if you haven’t.

Meanwhile, the net result of all of this grandstanding and outright thuggery (for a definition of the word, look up Andrew Cuomo in the dictionary) is that the top executives from AIG and other leading financial institutions are handing in their bonuses with one hand while signing new employment agreements with firms overseas that, as part of those new agreements, are agreeing to replace those bonuses as recruitment incentives.

Even without the enticement, who would possibly want to work for AIG these days?

And so, the American taxpayer, who is already into AIG for $200 billion, has just assured that the asset “we” have paid so dearly for is little other than a gutted shell run by second-rate people. Oh, and those second-raters will be forced to deal with trillions in remaining derivative contracts. It will be akin to asking monkeys to repair jet engines.

Of course, as the next wave of planes begin to fall from the sky, the government will again rush in… with your money.

In any event, the “Glimmers of Hope” part is that the soon-to-be-former AIG employee’s letter may, just may, help cool down the mob psychology that bordered on violence last week.

A Politician I Can Support

(Press TV, March 25)

Some Concluding Thoughts

David again. Remarkably, I could go on, but I fear I have tried your patience enough for one day. So, what are we to make of all these stories?

First, the Obama administration is clearly statist. And they apparently have set their sights on taxing the productive elements of society to the fullest possible measure. As I have noted in the past, however, businesses don’t pay taxes – rather, they just pass the taxes on to their consumers (or they go out of business). And so every time you see a new business tax, cover your wallet.

While the higher net worth individuals will, for a time, accept higher and higher tax burdens, unlike the proverbial frog in a pot of water that is slowly approaching boil, those with the assets to move will – when the temperature reaches uncomfortable – hop out of the pot and head to friendlier grounds.

Recognizing this truth, the Obama administration is already working on exchange controls. That is clear in the Obama campaign promise to use tax policy to punish companies that ship jobs overseas, a promise he is now putting into effect ala Volcker. Once those particular bricks are laid, adding on a few more layers in order to also wall in the individual is a snap.

Now, some of you – many perhaps – arrive at this point in time as supporters of Obama, and so bristle at my remarks. Just as do those of you who favor the views of the strident opposition from the “right,” unhappy at my quick jibe at Bush’s policies.

It behooves me, as the managing director of a company that makes its payroll by offering solace and substance to its subscriber base, to caper and scrape to our clientele. You, to be specific.

To the extent that I offend, I apologize. But only because that is not my intent, no matter the tone of voice I might use in these weekly musings. Rather, I sit here, like you, an observer of the world around us, and I try to make sense of things. Last week, I expressed outrage at the scramble to foist our current problems onto the backs of our progeny. Today, the pattern that is visible in the collection of articles here tells me things are moving quickly beyond the matters related only to the economy. And so, looking over the landscape, I am touched by an entirely different emotion… one of deep concern for the very nature of our society.

What does all this have to do with investing, some of you will angrily write?

That, of everything, has a simple answer: with a clear, albeit disturbing pattern now emerging, so, too, are the personal opportunities to protect yourself and to profit. Gold, silver, foreign investments, contrarian stock market opportunities, strategically structured futures and options strategies to take advantage of volatility – all those and more.

These are, of course, topics we cover in great detail in The Casey Report and our other publications. And to a lesser degree, these weekly ramblings.

Regrettably, because of my duties related to getting the next edition of The Casey Report out by this time next week, I need to leave it at that, despite my promise last week to share some of the highlights from our just concluded Crisis & Opportunity Summit in Las Vegas.

I will endeavor to do so next week. I just felt the material I covered here was more important, and hope you concur.

Miscellany…

Tokyo Phyle. One of our subscribers in Tokyo is looking to start a phyle. If you’d like to meet up with other Casey subscribers in that city, drop Kristen a note at phyle@caseyresearch.com.

You Are the Best! A quick note to say, as I have before, how wonderful it was to spend time with so many of you at the Las Vegas summit. After the event ended, virtually every speaker I talked to told me that the audience was the finest, most intelligent, and impressive they had ever come across. I couldn’t agree more.

Finally, because it’s sort of funny, I wanted to close by updating the story of my quick short on the S&P, using Scottrade. As you may recall, I used words to the effect that one of the advantages of an online trading account is how quickly you can short the market (in that case, using RSW, a 2X inverse S&P ETF). At one point during the day that I was writing that issue of The Room, I was up about $800 and was going to close my position with the quick profit, but got distracted by my son asking me to check out something he was doing on a video game. By the time I remembered my short, the market was closed. Long story short (excuse the pun), that gap in attention has, so far, cost me about $15,000.

I am, however, unconcerned. There is so much bad egg now baked into the cake that the rally of late simply can’t be sustained, and today appears to be wobbling. And so I will hold my inverse ETF shares and even add to them on any further rallies. I’ll let you know how it worked out when I finally close out the position.

In the meantime, I hope you gain some benefit from my experience. Namely, because something is easy – i.e., popping into an online trading account to make a quick trade – it also makes it more likely you will take the action, based on little more than impulse and a quick flush of emotion.

On that note, I will share with you Terry Coxon’s dictate. Which goes something like this, “The next time you spot a really, really exciting investment opportunity, one that you absolutely have to act on immediately, the first thing you should do is to look around for a comfortable chair, sit down in it, and take a few deep and relaxing breaths.”

Always good advice.

And with that, I sign off, thanking you for reading and for being a subscriber to a Casey Research publication. We work only for you, and it is a pleasure to do so.

David Galland
Managing Director
Casey Research, LLC.

The Room – 03/06/2009

David Galland — Fri, 06 Mar 2009 17:22:00 GMT

March 6, 2009

Dear Readers,

Of late, it seems as though I have gotten sideways with the technology deities.

First, as reported recently, was my accidental deletion of an hour-and-a-half recorded interview with trading gurus Dave Hightower and Terry Roggensack.

Then, yesterday, while waiting to put in a phone appearance on the U.S. Global Funds Webinar that many of you sat in on, I carefully put my speaker phone on mute (you can tell it's on because the button lights up) and set about trying to wolf down a chicken salad sandwich before it became my turn to talk.

This led to being reminded of several of life's little lessons. Including...

Eating quickly is never a good idea, because it can lead to aspirating, as opposed to swallowing, one's food.
Once aspirated, a fairly decent-sized piece of food – say, for example, chicken salad – can actually make its way up through one's sinus passages. In fact, with enough coughing, hacking, turning red, grabbing of the throat, choking and blowing, the aspirated morsel can actually traverse the nasal passages and exit through the nose.
And, finally, I was made to recall the fallibility of technology when I learned, after the fact, that a lit-up mute button is no firm guarantee that the phone is actually muted.

It was only when someone stuck their head into my office to let me know that my close run with lunch was being broadcast live that I became aware of the latter point. To which I whispered incredulously, "But that's impossible... I have it on mute, see!" In reply, I received a shrug and a statement that was as accurate as it was succinct, "Must be broken."

For those of you on the call, and especially my fellow presenters, whose carefully prepared presentation, I was later told, was disrupted on multiple occasions, my sincere apologies.

And to the technology gods, I supplicate in your general direction.

Before moving on to more substantive topics, a quick "thank you" to everyone who submitted entries for my growing category of dramatic music. While there were many excellent additions to the library – and I will share more in weeks to come – the hands-down winner this week was sent from Phil of our New Zealand contingent.

You may have seen this particular piece of music/video... because apparently over 1.5 million viewers have. But I hadn't and so really enjoyed the setup and the unlikely singer's powerful delivery. Real goose bump stuff, guaranteed to bring a smile to your day. Enjoy...

http://www.youtube.com/watch?v=bEo5bjnJViA

I might add that the humble phone salesman went on to become an acclaimed opera singer – according to PR Newswire, "his debut album ‘One Chance' stormed to the top of the charts in 13 countries and notched up an astounding 27 platinum and four gold awards." His second album "Passione" is due to being released in April. Proof that even in these days, which are often filled to the brim with hopeless-seeming news, dreams can and do come true.

And now, on to the decidedly less entertaining aspects of our modern world.

Desperate Measures

As I write, the U.S. stock market is not yet open, on Friday, March 6. Yesterday was yet another bad-hair day for stock investors, with the DJIA off 281 points and the S&P 500 off 30 points to 682.

At this point, it is hard to see what Team Obama will do, or even can do, in the attempt to stop the bleeding-out of equities markets.

I mean, consider!

They have announced increases in capital gains taxes, and that didn't work!
In tandem, they announced that the dwindling number of people who still have money to invest should rather give more of that money to the government in the form of higher taxes. And that didn't work.
Members of the Obama administration have gone out of their way in recent weeks to let the financial markets know that, in their expert opinions, the crisis is only going to worsen. In fact, just this week, Goldman Sachs's Secretary of the U.S. Treasury Mr. Geithner, speaking at yet another Senate hot-air festival, reminded potential investors that "this is still a deepening recession and a deepening credit crunch." Those sentiments were echoed by the president himself, who helpfully pointed out that, should the government fail to act with appropriate vigor, things could move from "crisis into a catastrophe."

And yet, the stock market stubbornly refuses to mount anything resembling a solid rally. Go figure.

Hold the phone!

The nice thing about an online discount trading account is how quickly you can place a trade: in this case, buying an inverse S&P ETF, which I just did. We'll check in later to see how the trade works out.]

So, what's Team Obama to do? Besides taxing and trash talking the economy, that is? Well, that and promising to beggar our great-grandchildren by opening the spigots on a tidal wave of monetary Kool-Aid, served up by a new army of fresh-faced Obamacrats?

This is no idle question: while the voting masses will give the prez his 100 days and probably more, a systematic failure in the economy over the next few years is unlikely to be rewarded at the polls. Should such a failure continue to gain steam, Obama risks being labeled even by his own as a false messiah, at which point, out come the stones.

The fact is, despite its many powers and foot soldiers, there's only so much that government can do at this point... and none of it without the steep potential for unintended consequences and naked risk. In no particular order, here's a quick summary of the possible measures left to the increasingly desperate government:

Suspend Mark-to-Market Rules. On March 12, a House Financial Services subcommittee will be gathering for free lattes, donuts, and a chat about suspending mark-to-market accounting standards. Simply defined, financial institutions are now required to establish, for accounting purposes, the fair value of their assets, using as a basis the "price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date."

The problem, of course, is that there currently isn't a market for much of the toxic paper now clogging the pipes of banks and other financial institutions. By exposing the folly of past decisions made by these institutions, mark-to-market rules have required these giants of finance to regularly fess up to the huge losses they have incurred.

Hypothetically, by suspending or modifying the rules, the operators of the many beggared institutions could straighten themselves up, adjust the old school tie, run a comb through their thinning but well-coifed hair, and announce that the toxic stuff was actually worth something. The "something" would, of course, be based on this model or that which imputes an elevated valuation at some distant point in the future.

With their persistent capital problems relieved, the bankers would then entice investors back to their equity by speaking in their most stentorian tones while pointing to a fresh set of metrics designed with special appeal to "value" investors.

Or, at least, that's how things are supposed to work out.

The people I have spoken with on this topic have expressed opposing views on whether mark-to-market as it now stands will be nudged over the side of the sinking ship. One well-placed money manager told me that he thinks it's unlikely it will be dumped, but that, if it is, the stock market could stage a 60% rally from here.

Another told me that there was no way that the government will tamper with it, because they would worry (correctly, in my view) that changing the rules in any material sense could be the final straw in destroying the thimbleful of credibility still retained by the financial institutions.

Personally, I think the potential of a change to these rules is very real – with the rationale for doing so announced in double-speak that positively drips of good intentions and sound practices. As to the reaction of the market, who can say? If the changes coincide with a general fatigue among the bears, and are possibly supported by some encouraging buying from friendly parties, they could spark a rally, and maybe a big one.

On the other hand, it could also put the match straight to the powder and result in an explosive collapse.

I wish I could be a bit firmer in my opinion of how this could shake out, but conjecture is all that is possible at this point. I'll keep trolling around for informed opinions, but the key thing now is to watch the upcoming hearings closely, and to watch for the trial balloons that the government likes to send up before making its decision. Knowing what's coming is half the battle, even if only as a signal to run for even deeper cover.
Bad Bank. Speaking of trial balloons, the government has floated veritable blimps with the phrase "Bad Banks" emblazoned across their girths.

A picture of the latest Bad Bank plan, snipped out of the Wall Street Journal, is shown here.

Adding some context to the graphic, the idea is for the government, along with the private sector, to pony up as much as $1 trillion to buy distressed assets.

As the graphic helpfully points out, "Investment managers who agree to put up a certain amount of capital would run the funds."

That caption may be translated as "Goldman Sachs and JPMorgan and other Wall Street insiders will be able to borrow money from the government on extremely favorable terms, with no recourse for failing to repay, as long as they agree to invest it back into the Bad Bank fund. As a reward for providing cover for this operation, the banks would earn billions in fees earned off the bulk of the money deposited in the fund, which will come directly from the Treasury. Big party follows."

Turning to the next caption over, we see that "Investors, such as pension funds, would be able to participate in the funds."

I think I have this part straight. What they are saying is that now that the Friends Of Obama (previously known as Friends of Bush) are well positioned, the investment managers are going to search the world over for the last of the really stupid pension and money managers, a moniker aptly applied to anyone willing to invest in a toxic soup of bad-asset-backed securities. They may find a few who can both drool and write a check at the same time, but not many.

In reality, what will likely happen is that (a) the government will print up another trillion to buy the bad assets, then (b) pay their buddies billions to "take a meeting" at a posh eatery a few times a week. Meanwhile, the financial institutions who sold the toxic stuff off to the Bad Bank fund will be able to sally forth to greener pastures, leaving the taxpayers with the bill for the bailout... and the bankers' many lunches.

Do I think we'll see a Bad Bank? Almost certainly. Will it solve the problems besetting the economy? No. Rather, it will just continue the process of transferring the liabilities from where they belong onto the back of the already overburdened taxpayer.

But it could result in a stock rally, if only for a limited time, and only for the stocks of the companies doing the dumping of the toxic stuff.

As for the overburdened taxpayers: as Doug Casey writes in his Casey Report lead article this month, "Street Fighting Man," taxes are a strong possible trigger for social unrest. It may already be starting, with the first proverbial (for now) shots fired this week in Hoboken, New Jersey, when a mob tarred and feathered the mayor in effigy for refusing to deal with oppressive levels of taxation. More on that story here.
Fed Buys Long-Term Treasuries. The Fed has, periodically, floated the idea of stepping into the market to buy long-dated Treasuries, should the need arise.

We think the need will arise, because of (a) the sheer scale of the government financings that will be required this year, and (b) the fact that foreigners are running out of cash due to domestic spending need and falling exports to the U.S., and maybe even running out of patience with the now official U.S. policy of monetary prolificacy. As foreigners have been about the only buyers of long-dated U.S. Treasuries in recent years, the shortfall caused by their reduced participation can only be made up by taxes – but tax revenues are plummeting right along with the engines of commerce that throw those off as byproduct – or by printing fresh dollars.

Which means, simply, printing is the only answer that will pop to officialdom's mind (the others require inconvenient free-market solutions).

So, what happens when the Fed is forced to begin buying up the longer-term paper?

For a time, interest rates might go down – simply because the primary buyer, the Fed, won't demand higher yields on its money. But rates won't stay down, because nothing will say inflation louder than the Fed becoming the lender of last resort to the Treasury, the self-described spender of last resort. At that point, the price of gold begins to soar, with interest following along in fairly short order.

As I am moving fast, I'm glossing over a new round of stimulus spending, and another after that – but those are pretty much taken as givens for now. And I'm sure I'm overlooking other desperate measures the government might take – for example, exchange controls or the creation of a dual currency system (one for the locals and one for the foreigners) -- but those will be more of a reactive nature following the broader collapse and the return of price inflation.

Of course, the government has the option of calling the whole thing off and turning their attention to supporting the free market... scraping the convoluted and counterproductive tax system in favor of a flat tax... reducing regulations... cutting government spending... but that's just silly talk.

In any event, if you have any thoughts on the topic, drop them my way at david@caseyresearch.com. In the meantime, the above seems a good list of trial balloons to keep a watch out for in the darkening skies.

Kindle Two

As readers of any duration are aware, my recent run-ins with technology aside, I have a fixation of sorts about Amazon's Kindle reading device. As I have described in far too much detail in prior missives, I think the K-I-N-D-L-E spells D-O-O-M for anything other than children's and coffee table book publishers, and I'm not so sure about the former.

Given that the other members of my immediate family agree on the many merits of the Kindle, most nights a scuffle of the friendly sort for the use of it occurs. That, and because I didn't need any other encouragement, really, caused me to rush out and buy the new Kindle as soon as it became available.

While I didn't think it possible, Amazon has outdone itself, smoothing out every first-generation bump and producing a truly elegant new reader.

I'm not going to go into any detail here, because there are now numerous articles on version two, but I will give it my wholehearted endorsement. It is more streamlined, functional, and just all around better than V.1, and that was already best of class, in my firmly held opinion.

Coincidently, this morning subscriber, correspondent, and fellow Kindle aficionado Ryan D. wrote in to suggest that we make our publications more Kindle-friendly (there is a function that allows you to email yourself documents to read on the Kindle, and apparently our letters currently don't "translate" very well). Jumping on the idea, I sent Ryan's email on to our production team, and they have already answered that this seems a task we can manage. And so, if I have anything to do with it (and I do), we will.

Not sure how long it will take, but we'll keep you posted.

Letters from You

I received a couple of letters this week that I thought worth sharing. In the first, D. White takes Jerry C. to task for the ditty on taxation he provided for last week's edition of this missive.

As I read D. White's comments, I chuckled -- but in a chagrined sort of way -- because I had entirely failed to register the point of contention to which she refers, and I near simultaneously remembered that the week before, I had shared the song "It's a Man's World" by James Brown and Pavarotti. Am I a subconscious sexist? I hope not... because I'm certainly not a conscious one.

In any event, here's the letter...

"Not one of these taxes existed 100 years ago and our nation was the most prosperous in the world. We had absolutely no national debt, had the largest middle class in the world, and Mom stayed home to raise the kids."

Well, let's see – there were no cars – so there goes the motor vehicle taxes, license taxes, gas taxes, etc. Of course, at that time, most people couldn't even afford a horse, streets were polluted by equine waste, a trip of 20 miles was a major production, and many people rarely or never left the town they were born in. I guess you think that we were all better off that way. The country may have been the most prosperous in the world (the Brits of that time probably disagreed), but life expectancy was lower, infant and maternal mortality higher, and the standard of living much, much lower. Read "The Jungle" for more details on how swell things were.

Mom had no choice but to stay home and raise the kids. And if anything happened to Dad, they were all likely to wind up in the poorhouse or county farm (they still existed), because she had no opportunity for decent employment. I think most women are grateful for their expanded horizons, Jerry – but perhaps you are the barefoot-and-pregnant kind of guy. If that's the case, let's hope that medical science (funded by the government) quickly gives you a chance to try being Mr. Mom. I'll be happy to personally chain you to the stove – which 100 years ago was much more dangerous than today and the cause of many house fires and women's deaths when their long skirts went up in flames.

Then, to liven up my day, I received this...

All I can say is, thank god Obama is willing to try to do something to unstick the system. Sarcastic philosophical rantings aren't doing it for me... nor do they help our country.

Richard

Here's the response I hastily dashed off in Richard's direction...

So, let me ask you a straight-up question. What is the economic theory – the past examples, if you will – of a government spending and taxing its way out of trouble? How exactly does that work?

The nation is bankrupt and, as would be the case with an individual, it has to come to grips with that fact. Grabbing another handful of credit cards and heading back to the mall solves nothing. It just makes things worse.

I can, and will, comment in whatever tone I see fit when I see a continuation of the same stupid and dangerous policies that got us here in the first place. Hell, I'd even happily go for the extra 40% tax increase that I will have to pay if Obama's budget passes, if it was part of a plan that actually had a chance of working.

But I am indignant at the idea that government should do "something" just "because," with zero basis in even rudimentary economics.

I hope that his rigorous actions give you a lot of personal comfort – that temporary comfort will be paid for by your great-grandchildren.

I include that last correspondence not to show that I can get my hairs up when pushed to it, but rather to stress that the skeptical comments I make now and again really aren't about Obama, per se... but rather, about his administration's clear willingness to stay the course -- the same course but even accelerated – as his predecessors.

Unlike, apparently, the often-contradictory Mr. Limbaugh (who, for instance, called for drug dealers to be shot at the same time he was a secret drug addict), I have no desire to see Mr. Obama fail... provided, of course, that we first define "success."

If in "succeeding," the Obama administration turns the nation into a socialist paradise, trapping my capital with exchange controls, and then slowly (or not so slowly) confiscating it for the "greater good," then I guess I'd prefer him to fail.

On the other hand, if his financial shell game somehow managed to get the country through to greener pastures and better days, then clearly that is an outcome I'd have to salute.

The problem is that, using history as our guide and seeing a litany of new initiatives that hardly help, and in many cases, actively hamper the enterprising individual, the only realistic conclusion I can come to is that the government remains stubbornly on the road to ruin.

The sign post for Bush's road read "To Baghdad." Obama's reads "To a Perfect World."

Both lead off a cliff.

On That Topic...

Thanks to subscriber Matt F. for sending this along...

The government cannot give to anybody anything that the government does not first take from somebody else.

When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that, my dear friend, is about the end of any nation.

You cannot multiply wealth by dividing it.

Dr. Adrian Rogers

Miscellany

Get Well Soon, Bud. In addition to his never-ending quest for truth in economics, our own Bud Conrad likes to engage in somewhat dangerous sports... like windsurfing off the coast of Northern California and, apparently, riding ten-speed bicycles too fast on city streets. Fortunately, it was his left arm he broke in three places, and not his right. Get well soon, Bud.
Phyle News.
- Alex C., who runs the first-ever Casey phyle at his coffee shop in Calgary, is looking to hold a get-together at some point in March.
- John is looking to start a phyle in the Minneapolis/St. Paul area.
As usual, if you are interested in participating in these or other gatherings of Casey subscribers around the country – and the world – drop us a note at phyles@caseyresearch.com.

And that, dear readers, is that for this week.

As I sign off, I see that the stock market has reversed rather sharply from its early enthusiasm and is now down 35 points. More to the point, the short position I put on as I began to write you today is about $800 to the good.

To be clear, I am definitely not a day trader. But given the news that greeted the opening bell this morning, that U.S. unemployment is at 8.1%, the highest in 25 years, the early rally made no sense. Ergo, the quick application of a short position.

Importantly, I was comfortable allocating a modest portion of the speculative corner of my portfolio to shorting the broader market, figuring that even if I do badly today, the stream of bad news is certain to continue into next week, and likely next month, and even next year. So, provided I can afford to weather a setback, which can happen at any time, then I am pretty confident I'll be able to close out the position within the week for a nice gain. And if the bottom falls out again this afternoon, then I'll make this a day trade after all and bank the short-term gain. At which point, I might take the family out to a nice dinner, enjoyed without any undue haste.

Adding a little frosting to the cake, I see that gold once again refuses to be pushed down and has bobbed back up to $939. While it is certainly not inconceivable – and maybe inevitable – we'll see it back in the 800s again before the final lift-off, there is no question we are showing firm support in here. And, as hard as we look, we can't see anything in the way of a serious obstruction to it holding up and going higher. Ditto, silver is starting to get pretty interesting, but that is a topic for another day.

Until next week, thank you for reading and for subscribing to a Casey Research publication.

David Galland
Managing Director
Casey Research, LLC.

The Room – 02/27/2009

David Galland — Fri, 27 Feb 2009 20:07:00 GMT

February 27, 2009

Dear Readers,

This morning, as I was looking over dispatches from correspondents around the world – from Ed in Alberta… Sadia in the UK… Baldy in Indonesia… the “General” in Portugal… and Nitin in Katmandu – I began to appreciate what it must have been like to be on the news desk during World War II.

I am trying not to be overly pessimistic, but there’s no denying the mass of bad news coming to us from all fronts: the forces of collectivism are using the cover of the crisis they largely created, aided and abetted by capitalism’s quislings, to roll over the individual.

Even so, contained within the dire reportage is also some very good news for you personally, and I’ll touch on that as well in today’s missive.

The Bad News

As fully anticipated, with its first budget plan, the Obama administration has fired a salvo into the side of the productive classes. (For those of you who are not U.S. citizens, feel free to use Team Obama as a proxy for what is likely to occur where you reside.)

Yes, we expected the $1.75 trillion budget deficit, which will, by the time all is said and done, come in a lot closer to the $2.5 trillion number anticipated some months ago by our own Bud Conrad.

Yes, we expected the government to begin raising taxes, which they are proposing to do with vigor – starting with an increase of $1.4 trillion on the people who earn in excess of $250,000 a year. “Right on!” shouts the mob, on the way out the door to burn Porsches.

For no other purpose than to keep the record straight, it’s worth noting that thanks to the government’s steady dose of inflation, $250,000 today will only buy you 77% of what it would have in 1998… and 56% of what it would have in 1988.

A decade from now, given the inflation rate we expect, the dollar’s purchasing power will erode by another 50%, and probably a lot more than that. In fact, at the current rate of money creation, by the time the dust settles, $250,000 might be the annual wage commanded by burger flippers.

But, hey, look at the bright side, at that point everyone will be rich!

The further details of Obama’s budget plan are a hodgepodge of this and that, some of which we even agree with (like cutting business subsidies). On the whole, however, the overarching mandate appears to be to thrust the hand of government, like some motion picture kung fu villain, deep into the heart of American enterprise.

And government’s expansion is far from over. Even as I write, the news continues to pour in…

Citigroup to get another $25 billion bailout from the U.S. Treasury.
Treasury officials work on bailout plan for auto parts manufacturers.
President Obama exploring automatic workplace pensions and an expansion of unemployment insurance.
AIG, now a government lap puppy, takes another big loss, and is again looking to its master for another handout.
Speaking of lap puppies, Fannie Mae, has lost another $25 billion and is looking for $15 billion more from the Treasury. The value of this zombie institution’s net assets is now a negative $105 billion, and eroding. Great investment of your tax dollars, eh?
Then there’s the new administration’s cap-and-trade green tax… a stunning new initiative that will bring many U.S. businesses to their knees. (You can read more about it here.)

There is more, so much more, including a $638 billion reserve fund for healthcare reform in the president’s budget that loudly broadcasts that, “Yes, we’re going there.” There being nationalized health care.

But you already read too much and don’t need me to rehash things as they are.

I will, however, comment on the way things will be, because in that, at least, we can find some good news.

The Good News

My fellow citizens of planet Earth, it is now abundantly clear that the trend toward socialism in all its many disguises is about to, once again, shift into high gear.

We’ve been here before, encouraged by the words of Karl Marx, a distinctly unsuccessful individual (to read his life story is to read of almost unending misery, poverty, and discontent) but a decidedly successful phrase-coiner, knocking the world off its axis with his “From each according to his ability, to each according to his need.”

While no one with any real sense of history, not to mention economics, can take any overt joy at the prospect of the dark clouds of collectivism looming high in the sky above us, there is, if you pay close attention, a very big opportunity in all of this.

Namely, we are now presented with a relatively rare chance to see with some clarity into the future.

Imagine if eight years from now you could step into a time machine and zip right back to this very moment. How much money do you think you could make?

Well, just because the chattering masses have the blinders on as they march forward to their collective penury doesn’t mean we need to join them. And, if we are even a little bit careful, we won’t.

So, what is it about the future we can now see? Some broad strokes…

Currency depreciation.
More taxes.
Rising interest rates.
A price capitulation in real estate, with a collapse in commercial.
Exchange controls (now that Team Obama is raising your taxes, you don’t really think they’re going to let you pick up your wealth and leave, do you? The window for global diversification will soon be closing.)
The return of mega-labor unions.
Trade wars, shooting wars, and other forms of heightened geopolitical tension.

(This is a topic we are discussing at greater length, backed up with specific recommendations, in the March edition of The Casey Report, which will be released on or around March 3. Among its many highlights, Doug Casey is just putting the finishing touches on his article titled “Street Fighting Man” about the prospects for social unrest.)

Provided you keep your personal wealth profile low (there was a reason Sam Walton, founder of Walmart, drove a beat-up pick-up truck), your financial powder dry, and, maybe most important of all, retain your sense of humor, the opportunities in the unfolding crisis will be abundant

We’ll do what we can to help you spot those opportunities in our various services. If you are unsure which of our services is right for you, don’t hesitate to try them all… we offer very generous trial subscriptions, most of which come with a full money-back guarantee if you don’t find the service a good match. We have no interest in trying to rope you into a service that isn’t exactly right for you, so don’t feel bad at all if you try a service and later cancel for a full refund. We’re just happy to have the opportunity to share our research with you.

You can learn about all our services, of course, at CaseyResearch.com.

Ed. Note

Casey Trend Trader

not

Casey Trend Trader

learn more about our Trend Trader trial offer here

Whatever you do, don’t be complacent about what’s coming.

We are long past the point where doing nothing is an option. Review your personal finances, cut out unnecessary expenses, talk to your accountant about tax planning, and, if you’re a U.S. citizen, consider moving at least some of your wealth out of the country while you still can (but please, don’t try to hide it… that’s a fool’s errand). If you own gold, only you and your spouse, if you have one, should be aware of it.

Ask yourself, “If I just dropped in from eight years in the future, what measures would I take?”

Now, take them.

A Musical Interlude

This week, I have been listening – repeatedly, according to certain innocent bystanders -- to the following tracks.

For the rock & rollers among you, Can’t You Hear Me Knocking from the Rolling Stones kicks off with one of my personal favorite guitar riffs. Listen to it here.

And for pretty much anyone, an odd but really well-done duet by James Brown and Luciano Pavarotti singing “It’s a Man’s World,” which was sent along by subscriber David B. in response to last week’s call for dramatic music. Now, I don’t know if this song is as sexist as its title makes it seem (I haven’t listened closely to the words), but watching James Brown doing his natural best to match vocal talents with Pavarotti is, alone, worth the price of admission. Which, in this case, is just a click on the link here.

Have some dramatic music you want to share? Shoot it my way at David@caseyresearch.com.

A Golden Opportunity

While it’s still a long shot, one possible outcome of the deluge of paper money about to hit the global economy may be that governments will be forced by simple math back to a gold standard: when you dump trillions of freshly created paper into the market, inflation must soar.

And because governments produce nothing, the servicing of all their many debts and new spending programs gives rise to the real risk that the inflation could devolve into a Zimbabwe-like downward spiral. At that point, the intelligentsia, uncomfortable at the sight of glowering pensioners growing tired of living on dog food, may be forced back to a sound money system.

For the most part the citizenry has no memory of a gold standard, and even less understanding of same. We expect that to change. And, in fact, an early straw in the wind showed up this week in the form of a YouTube video sent along by subscriber Peter F.

You really must watch this, given that it is an excerpt from a major cable news personality, Glenn Beck, who manages to wax intelligently on matters involving the gold standard. There may be hope after all.

Watch it by clicking here.

Meanwhile, rather than wait for government to act on gold convertibility for their currencies, individuals the world over are doing their own conversions by trading their paper currencies for the hard stuff in record amounts.

Rand Refinery Ltd.

Johan Botha

Many of you have written to us expressing concern about the potential for direct action by the U.S. government against gold, – now that it’s returning to its dominant role as a sound money – including an outright ban or confiscation. We don’t see any signs of that yet, but we’re vigilant.

Damn Foreigners

The rising power of the mob in virtually all of the world’s democracies invariably leads to geopolitical tensions.

That’s because the ruling elites know they need to pander to the blunt-force voting blocs if they are to retain their elevated status. And there are few issues more unifying to the mob than the sight of filthy foreigners taking advantage at the expense of the locals. Whether it’s the damn illegal wetbacks who dare to cut our lawns or wash our restaurant dishes on the cheap, or the crafty Chinamen willing to work for pennies a day to feed their families – thereby taking food out of the very mouths of good union folks here in the U.S.A. – fanning the flames of nationalism is as easy as drawing breath for any politician worthy of the label.

And so we’ll be seeing a lot more of that, too, as politicians on both sides of the spectrum revert to script in redirecting the blame for what is now unfolding, and what is yet to come, to anywhere other than where it belongs.

This is a dangerous game.

For starters, the U.S. is now deeply, deeply in debt to the rest of the world. While the Chinese have, so far, been tolerant, their recent demands for some form of guarantee before they buy any more U.S. agency debt is a clear signal that their patience with the U.S. government’s prolificacy is not without limits.

Some of you might protest that the Chinese and other foreign trading partners, looking for a commercial advantage by keeping our currency high, encouraged the U.S. government to spend, spend, spend by engaging in a policy well described as lend, lend, lend. And you are right. But since when does anyone have to take a loan, just because it’s offered?

At any point during the decades-long run-up in federal government spending, the reigning morons in the Washington swamp could have “just said no.”

Instead, they said “yes,” embarking on foreign adventures… spending trillions on building and then largely ruining the world’s biggest military apparatus… offering financial backing to liar loans… launching the mutant health care scheme that goes by the name of Medicare… and… and… agreeing to whatever other thick, fat-laden slice of pork the politicians thought the lazy-minded voteriat would find agreeable.

We don’t need to look overseas for people to blame. The culprits are still knocking around the halls of power, just wearing new ties (with cute little donkeys on them instead of elephants), their blubbery lips retrained to spout off about the need for new subsidies to promote this or that green energy project “for our children” (conveniently forgetting that their cousin Bob happens to be a big shareholder in said project).

Sorry about that. Got a little carried away, listening once again to Can’t Hear Me Knocking at high volume.

I need to move on, because I have to get back to editing The Casey Report, and because I just got invited to make an appearance this afternoon on Fox Business.

But before I go, I want to bring this down to a more human level by sharing the contents of an email I received this morning from Baldy in Indonesia.

I guess we’ll find out just how splendid isolation really is…

Look for the Union Label

By Donald Grove, Casey Research Washington Correspondent

After last week’s edition of this exercise in fulminating, subscriber Buster H., sent along the following note:

I am surprised you have not mentioned the major stealth labor union executive order signed (without any media coverage) by Obama on Feb. 6. Read the text here.

After reading the referenced document, I shot off a note to Donald Grove, our tireless Washington correspondent, asking him to turn over a few stones to get to the bottom of the story. Here’s his report…

Unions played a big role in putting Obama in the White House. His campaign website assured his labor backers that he would “fight for passage of the [so-called] Employee Free Choice Act” (which would eliminate secret ballots and leave workers who don’t want a union vulnerable to harassment), “ban the permanent replacement of striking workers, increase the minimum wage and index it to inflation to ensure it rises every year,” and “increase the Earned Income Tax Credit to make sure that full-time workers earn a living wage that allows them to raise their families and pay for basic needs.” Once safely ensconced as the nation’s chief executive, it was time for Obama to remember those who put him there.

On January 30, with inauguration festivities still a fresh memory, Obama signed three union-friendly executive orders reversing a series of Bush administration executive orders dictating how federal contractors are to deal with union workers.

Obama said, “We cannot have a strong middle class without strong labor unions. We need to level the playing field for workers and the unions that represent their interests. I do not view the labor movement as part of the problem. To me, it's part of the solution.”

AFL-CIO President John Sweeney, who attended the signing ceremony, said “The executive orders are the first step in a long road to restore balance between workers and corporations. As the weeks and months continue, we thank God that we have a president, vice president, and Congress who are determined to fix our economy so that it works for everyone.”

On February 6, the president tossed labor another bone. While this fourth labor-friendly executive order does not require executive-branch agencies to use project labor agreements on construction projects, “it is the policy of the Federal Government to encourage executive agencies to consider requiring the use of project labor agreements in connection with large-scale construction projects in order to promote economy and efficiency in Federal procurement.” Unions love these agreements, which were prohibited by the Bush administration.

Michael Steele, the new chairman of the Republican National Committee, had a different take, however. He said, “President Obama’s executive order will drive up the cost of government at a time when we should be doing everything possible to save taxpayer dollars. federal contracts should go to the businesses that can offer taxpayers the best value – not just the unions who supported the Democrats’ campaigns last year. Quietly signing executive orders to pay back campaign backers undermines Obama’s promise to change Washington. It is a disappointment for Americans hoping for more transparency and less politics-as-usual in Washington.”

According to two of America’s largest construction industry trade groups, the president’s orders would limit the number of workers hired on new federal jobs to build roads, bridges, and buildings – the very projects touted as creating millions of new jobs as part of the stimulus package. Jerry Gorski, national chairman of the Associated Builders and Contractors, said that 84% of the country's construction workers are not in labor unions. “If the purpose of these projects is to get Americans back to work, why would we pick an approach that would allow only a small percentage of the construction workforce to participate?” Brian Turmail, speaking for the Associated General Contractors, said Obama’s executive order “takes the contractor out of the process of negotiating with their employees and puts the government in that role.”

Here are the orders for those who wish to scrutinize.

2009-01-30 Notification of Employee Rights under Federal Labor Laws
2009-01-30 Nondisplacement of Qualified Workers under Service Contracts
2009-01-30 Economy in Government Contracting
2009-02-06 Project Labor Agreements

A couple have not yet appeared on the White House Briefing Room at http://www.whitehouse.gov/the_press_office.

I’m sure many of you will recall this inspirational jingle: http://www.youtube.com/watch?v=tNTpOnZqeUo

Thank God it’s Friday!

Regards, Don

State Sovereignty – Saying “No” to the Feds

By Shannara Johnson

David again. There have been a number of articles recently about the possible break-up of the Eurozone. Before those of us in the U.S. get too smug, we might want to wonder if something akin to that could happen here. “Never!” I can hear some of you exclaiming, and you are probably right. But we are very much heading into unchartered waters, with a serious power grab on the federal level that leaves the states with much of the costs associated with complying with the spate of new regulations.

Shannara Johnson, a senior researcher and editor here at Casey Research who touches almost everything you read from us – quite amazingly so – found the time to dig in on something of a revolt now brewing in capitals around these 50 states. Her report follows…

Drowned out by the fiscal calamities of recent months, there is a new “movement” in the United States; one that has, incredibly, received little attention from the mainstream media. Not so united anymore, an increasing number of states have been introducing resolutions to declare sovereignty.

Now, to clarify this, a declaration of sovereignty is not the same as secession. Rather, it is the assertion of states’ rights – rights that are guaranteed by the Constitution and have been, in the view of many state governments, eroded or usurped by the bigwigs in Washington, DC.

In the words of Arizona state Rep. Judy Burges, “We are telling the federal government that we are a sovereign state and want to be treated as such. We are not a branch of the federal government.”

The states are pointing to the 9th and 10th Amendments, which affirm, “The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people” and “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”

Even though it’s not secession, it is definitely a warning shot. The resolutions demand that the Obama administration “cease and desist” from unrestrained government expansion; they also imply that federal laws and regulations that violate the 10th Amendment can be nullified by the states.

So far, ten states have recently drafted or are about to draft bills to declare sovereignty: Oklahoma, Arizona, Missouri, Michigan, Hawaii, Montana, New Hampshire, South Carolina, Washington, and Texas. And according to analysts, up to 20 more states may follow suit this year, including Alaska, Alabama, Arkansas, California, Colorado, Georgia, Idaho, Indiana, Kansas, Nevada, Maine, and Pennsylvania.

The complaints mainly revolve around federal legislation imposed on the states without their consent; pet peeves include gun control laws, martial law provisions, freedom of religion and speech, and out-of-control federal spending.

“Live Free or Die” state New Hampshire’s resolution is one of the harshest:

NH Representative Dan Itse told FOX News’ Glenn Beck, “It’s a line in the sand to tell the federal government that they are no longer allowed to transgress the Constitution, and if they do, then they’re nullifying the Constitution.”

So far, so good. Here at Casey Research, ever the small-government advocates, we might be inclined to applaud the gutsiness of the states’ lawmakers. However, as Beck pointed out in his interview with Itse, some things just don’t add up.

For example, despite tough words and fingering the revolvers strapped to their hips, many governments of the very same states that are declaring sovereignty do not seem to mind holding their hands out for their share of the stimulus money the Obama administration is dangling in front of them. They just don’t like to be told by the feds how to spend it.

The Washington Times reported that Republican governor Mark Sanford of South Carolina “aggressively opposed the stimulus plan. However, in a Thursday morning interview on CBS’ ‘The Early Show,’ Mr. Sanford said his state would accept money from the stimulus bill. Opposing the plan ‘doesn’t preclude taking the money,’ said Mr. Sanford.”

Pragmatism or hypocrisy? Tad DeHaven of the Cato Institute chooses the latter, noting that about a third of average total state spending comes from the federal government. Brian Riedl, a budget analyst at the Heritage Foundation, agrees: “To a large degree, states are scapegoating their budget problems on Washington. It’s tough to be sympathetic for states and local governments when they go $467 billion in federal grants last year.”

Tax Revolt – Part I

Friend and mining stock guru Rick Rule sent the following along this week…

Actual “Letter to the Editor” from the February 5th edition of the Wichita Falls, Texas Times Record News...

Dear IRS,

I am sorry to inform you that I will not be able to pay taxes owed April 15, but all is not lost.

I have paid these taxes: accounts receivable tax, building permit tax, CDL tax, cigarette tax, corporate income tax, dog license tax, federal income tax, unemployment tax, gasoline tax, hunting license tax, fishing license tax, waterfowl stamp tax, inheritance tax, inventory tax, liquor tax, luxury tax, Medicare tax, city, school and county property tax, real estate tax, Social Security tax, road usage tax, toll road tax, state and city sales tax, recreational vehicle tax, state franchise tax, state unemployment tax, telephone federal excise tax, telephone federal state and local surcharge tax, telephone minimum usage surcharge tax, telephone state and local tax, utility tax, vehicle license registration tax, capital gains tax, lease severance tax, oil and gas assessment tax, Colorado property tax, Texas, Colorado, Wyoming, Oklahoma, and New Mexico sales tax, and many more that I can't recall, but I have run out of space and money anyway.

When you do not receive my check April 15, just know that it is an honest mistake. Please treat me the same way you treated Congressmen Charles Rangel, Chris Dodd, Barney Frank, and ex-Congressman Tom Daschle and, of course, your boss Timothy Geithner. No penalties and no interest.

Ed Barnett
Wichita Falls

P.S. I will make at least a partial payment as soon as I get my stimulus check.

Tax Revolt – Part II

Thanks to subscriber and periodic correspondent Jerry C. for sending this along…

Tax the table at which he's fed.

Tax his tractor, tax his mule,

Teach him taxes are the rule.

Tax his work, tax his pay,

He works for peanuts anyway.

Tax his cow, tax his goat,

Tax his pants, tax his coat.

Tax his ties, tax his shirt,

Tax his work, tax his dirt.

Tax his tobacco, tax his drink,

Tax him if he tries to think.

Tax his cigars, tax his beers,

If he cries, tax his tears.

Tax his car, tax his gas,

Find other ways to tax his ass.

Tax all he has, then let him know,

You won't be done till he has no dough.

When he screams, then tax him some more.

Tax him till he's good and sore.

Then tax his coffin, tax his grave, tax the sod in which he's laid.

Put these words upon his tomb,

“Taxes drove me to my doom...”

When he's gone, do not relax,

It’s time to apply the inheritance tax.

Accounts Receivable Tax, Building Permit Tax, CDL License Tax, Cigarette Tax, Corporate Income Tax, Dog License Tax, Excise Tax, Federal Income Tax, Federal Unemployment Tax (FUTA), Fishing License Tax, Food License Tax, Fuel Permit Tax, Gasoline Tax, Gross Receipts Tax, Hunting License Tax, Inheritance Tax, Inventory Tax, IRS Interest Charges/IRS Penalties (tax on top of tax), Liquor Tax, Luxury Taxes, Marriage License Tax, Medicare Tax, Personal Property Tax, Property Tax, Real Estate Tax, Service Charge Tax, Social Security Tax, Road Usage Tax, Sales Tax, Recreational Vehicle Tax, School Tax, State Income Tax, State Unemployment Tax (SUTA) Telephone Federal Excise Tax, Telephone Federal Universal Service Fee Tax, Telephone Federal, State and Local Surcharge Taxes, Telephone Minimum Usage Surcharge Tax, Telephone Recurring and Non-recurring Charges Tax, Telephone State and Local Tax, Telephone Usage Charge Tax, Utility Taxes, Vehicle License Registration Tax, Vehicle Sales Tax, Watercraft Registration Tax, Well Permit Tax, Workers Compensation Tax.

Not one of these taxes existed 100 years ago and our nation was the most prosperous in the world.

We had absolutely no national debt, had the largest middle class in the world, and Mom stayed home to raise the kids.

What happened? Can you spell P-O-L-I-T-I-C-I-A-N-S?

David again. If you are not yet tired of this week’s bashing of government, read the following opinion piece titled “America’s biggest problem is big government” by Dr. Gary Wolfram of Hillsdale College. It’s worth a read. Click here.

Miscellany

Toronto Phyle. On March 3rd at 7:30 p.m., the Toronto Phyle will be hosting three members of the Casey Research team, all of whom are in town for the annual Prospectors and Developers conference. If you are going to be in the area and want to connect with other Casey subscribers as well as Jeff Clark, editor of BIG GOLD, Doug Hornig of the Daily Resource, and Louis James, our senior researcher and editor of the CIA and International Speculator, drop us a note at phyles@caseyresearch.com and we’ll get you the details.
In Other Phyle News… Oren in Israel… John in Boise, ID… Michael in the Quartzsite/Parker, AZ, Blythe, CA area… plus other individuals in Edmonton, Alberta… Kingston, NY, and Wichita, KS, are willing to host subscriber get-togethers. Drop us a note at the email address just above, and we’ll get you connected.

And that, dear readers is that for this week. As I look at the screens, I see that the stock market, after having opened up sharply lower, is now down just a little… while gold is trading at $940, well off from its latest run-up near the $1,000 mark. That’s okay. This is not a sprint we are in but the early days of a grueling trek to what’s next. Gold will be a critical part of our financial travel kit and, at times along the way, a pretty good trading sardine, too. For instance, if it gets knocked back into the mid-$800s.

Stay the course.

Before signing off, I would like to give a special thanks to all of our many correspondents. Over the years, we have built a large and robust international network that now serves as an early-warning system for our team. You collectively make our task of scanning the world for what is important far easier… and individually, you make my job all that more agreeable.

For those of you who will be making it to Vegas, let’s grab a beer together. And for those who won’t, a toast in your general direction.

On the topic of Vegas, or more specifically, our upcoming Crisis & Opportunity Summit, we never did quite get around to sending out a big promotion, but the conference is all but sold out at this point. We can take a few more registrations, but just a few. By this time next week, it will be a complete sell-out. So, if you’re still interested, and you should be, the time to act is now. More info here.

Until next week, thank you for reading and for being a subscriber to one or more Casey services.

Sincerely,

David Galland
Managing Director
Casey Research, LLC.

The Room - 09/26/2008

David Galland — Tue, 30 Sep 2008 21:34:16 GMT

September 26, 2008

Dear Readers,

What a world I have returned to from my cloistered retreat at the beautiful Vivenda Miranda, scenically situated on a cliff outside of the quaint port town of Lagos, Portugal.

Everything has changed.

Everything is changing.

The storm we have so long tried to help you prepare for is upon us. At this point, I can only hope you have your sails rigged for the storm now breaking, because time is running out.

The violent volatility I warned of when last I wrote has arrived, with towering waves now rising up and smashing into the economy - and as an unavoidable consequence, our personal portfolios -- from all sides.

Overnight the holders of my mortgage, WaMu, failed, the largest bank failure in history. This week, the golf course that I usually play on was taken over by the government... last week it belonged to AIG.

As you don't need me to tell you, that same government now wants to spend over a trillion dollars to bail out Wall Street and to shore up the money market mutual funds - which have so far flown under the radar screen despite portfolios stuffed to the brim with bad paper.

While no one was paying attention, U.S. automakers used their election year leverage to win approval for $25 billion in low-interest loans.

As you can see in the chart shown here, the monetary base of the U.S. has surged, a topic we'll have more on in The Casey Report, which will be released next week. Even before the bailout, the government has begun doing what it knows best... pumping up the money supply in a desperate attempt to save the economy from the crash it so desperately needs.

According to Reuters, last week the Fed lent nearly $188 billion per day, on average, to banks and money managers.

Last week, as this fiscal prolificacy was underway, gold surged as we expected it to. This week, it has consolidated, holding its gains but not pushing higher yet.

We don't care.

Owning gold right now is the right thing to do, on multiple levels. Others are now quickly coming to that same understanding. This week, I have had two calls from people I haven't heard from in years, asking me how to buy gold. And then there's this...

From a correspondent in Switzerland...

So, we call Bank Cantonale Bern. The Cantonale Banks are like BofA in the States - it's a huge retail banking company with branches in most towns. We learn, yes, they have limited bullion for gold but no silver.

The surprise came when we arrived at the bank this afternoon. The bank has a teller window, segregated off to the side of the others, with a sign above the window that read,

"Change & Gold" (foreign currency and gold coins)

We had to wait in line. I bought the last of the one-ounce bullion they had - Krugerands. And there were people behind us in line. The woman who helped us said that the demand for gold has been so strong that they made it available via front-line employees, rather than through a bank representative in a private, "behind the counter" transaction. And they haven't had silver for several weeks. She said supplies of silver had been sporadic at certain branches in Zurich.

So there you have it. A retail bank where you can conduct business in gold just as easy as Swiss francs. A developing trend? One can only hope.

Just a few minutes ago, my dear friend Mr. Watson, whose birthday it was I went to help celebrate in Portugal, tipped me to this... from the Toronto Star.

Coin dealers from the U.S. to Canada have reported a surge in buying of bullion coins and other gold products as troubles in the financial markets prompt people to seek a safe haven in precious metals.

"Demand has exceeded supply for American buffalo 24-karat gold one-ounce bullion coins, and our inventories have been depleted," the mint said in a note to its dealers. "We are, therefore, temporarily suspending sales of these coins."

The trading herd will follow the physical buyers. The recent $100 surge was just a precursor. The lag in understanding - and action - is understandable. The global economy is in a true paradigm shift. People don't want to believe what their eyes and ears are telling them. And so, at this point the trading herd is standing en masse, eyes wide open, nostrils flaring, muscles twitching spastically, waiting for the news that will tell them which way to bolt for safety.

While they are only to be used by the attentive, and with great caution, I am now using a variety of options and futures strategies to leverage what's coming. I will never risk so much as to put myself in any real financial trouble. But, with that filter, I am now positioning myself for higher gold prices and a falling stock market (I suspect one more dead-cat bounce after the bailout is passed... then watch out below).

Higher interest rates are a sure thing, but there will likely be a lag between now and then as well. Structure things right, and you can ride through any possible downturn, then earn extraordinary returns as things move in your favor. But the key thing to remember is that, like hot chili sauce, a little leverage goes a long way... and a lot of leverage can burn you, badly.

Knowing where your money is has also become very important. In the upcoming edition of The Casey Report, we'll also be presenting a detailed explanation of how to be sure your bank will be one of those still standing after the storm.

Ed. Note

The Casey Report

Try our 3-month no-risk trial now.

Whatever the final form of the bailout, and I am convinced there will be one - the money may not flow in exactly the way that Wall Street wants, but it will flow nonetheless -- in the medium to long term, the die is cast. The hegemony of the U.S. dollar in international trade is coming to an end (more on that momentarily). Given the lack of a tangible alternative, namely one that is not solely faith based, a new currency regime will arise. It's impossible to gauge from this distance what it will ultimately look like, or who will sponsor it (there is talk of the IMF fulfilling the role), but it's safe to assume it will have to include gold and other tangibles.

We live in dangerous, yet exciting, times. We'll continue doing our part to keep you in the know, and on the right side of things.

Moving along, I want to share a front-seat analysis on this week's congressional hearings on the bailout from Donald Grove, our new Washington correspondent.

The Bailout: Behind the Scenes

By Donald Grove

I went to hear Fed Chairman Ben Bernanke testify this morning before the Joint Economic Committee (Chairman Chuck Schumer, D-NY), primarily on the Bush administration's capital markets intervention proposal. I thought I would pass on my observations, which will probably be different than what you read in the mainstream press. Bernanke has had it rough lately. He was testifying yesterday with Treasury Secretary Hank Paulson and SEC Chairman Chris Cox before the Senate Banking Committee (Chairman Chris Dodd, D-Conn) and was scheduled to testify with Paulson later this afternoon before the House Financial Services Committee (Chairman Barney Frank, D-Mass).

Schumer recalled that Bernanke last appeared before the Joint Economic Committee in April, following the narrowly averted collapse of Bear Stearns. He said "Most of us thought we had just witnessed an event that we were likely never to see again in our lifetimes. And yet, here we are, only six months later, and we are discussing a crisis many orders of magnitude greater." Schumer stated, as did others, that "we must act and we must act soon." Those statements were not without reservations, however, and I would add that not acting may be the more prudent course. There seems to be a compulsion on the Hill to do something, even if it's wrong. I guess that's what legislators think their constituents expect - and maybe they do. New York Mayor Michael Bloomberg told NBC's "Meet the Press" that "nobody knows exactly what they should do, but anything is better than nothing." Not necessarily so - in fact, probably not so. "Expecting Congress to fix the current financial crisis is like expecting an arsonist to put out the fire he started," said Representative John Shadegg (R-Az).

Schumer told Bernanke that "Americans are furious" and that he and probably each of his colleagues have heard "amazement, astonishment, and intense anger" from constituents. No doubt, but why? According to Schumer, "over the last eight years, we were told that markets knew best, that financial alchemy had reduced risk to an afterthought, and that we were entering a new world of global growth and prosperity. Instead, what we have learned is that we now have to pay for the greed and recklessness of those who should have known better." Talk about the pot calling the kettle black. I personally recall hearing Schumer in a hearing on the Hill within the last eight years demanding that the less fortunate be given access to home mortgages so they, too, could realize the American dream. He was not alone. The former Fed chairman urged Americans to avail themselves of adjustable-rate mortgages. As was often noted during today's hearing, there is plenty of blame to go around. What worried me was the tendency to lay blame for this debacle on the free market.

As I noted above, I think doing nothing may be the best thing Congress can do right now. In fact, if Congress had done nothing in the past, we might have avoided a lot of these problems. It's never too late to stop meddling. Why not start right now? Rep. Kevin Brady (R-TX) suggested that we just let the free-market system correct itself. Of course the Fed chairman did not agree. He told Sen. John Sununu (R-NH) that we need to figure out what the price should be on complex securities so that private capital can come in and help buy them up so that banks can reestablish capital to make loans. Ron Paul, in prime form, said that most illiquid assets are illiquid because they are not worth anything. He added that price fixing prolonged the Great Depression, and that is what is being proposed now. He said that messing with prices risks socialism. Paul said the Fed is not smart enough to fix prices. Hear! Hear! Nor, I would add, is the Treasury Secretary or Congress. The free market, however, is uniquely able by its very nature to set prices just right, including, by the way, interest rates - the price of money.

Congressman Paul asked where this $700 billion will come from. Not from taxes or borrowing from China. He said it will come from us, presumably through the insidious tax of inflation. He explained that the downturn in housing is because housing is overpriced. Let housing prices come down, he said. He said, "We can't solve inflation with more inflation." Paul asked the Fed chairman where his authority comes from and noted that only 15% of Americans care about the Constitution or the rule of law - and less than that in Washington, D.C.

Bernanke conceded that price fixing was counterproductive but insisted that we have to somehow "discover" what prices are. Duhhh! That's what the free market is for! As to his authority, he cited the Federal Reserve Act ..... "now if you disagree with the Act...." Well, I do disagree, and I think Ron Paul also believes that the creation of the central bank in 1913 was where a lot of this trouble started. Nevertheless, I don't think the Fed has even been complying with the mandate and constraints of the Act.

Refreshingly, retiring Senator Jim Saxton, ranking member on the Committee (R-NJ), noted that it would be nice if we could go to a safe at Treasury and take out about 5% of GDP to bail out financial institutions, but we can't. We have to borrow it, he said (albeit probably surreptitiously from our unborn progeny). I am always heartened to see that someone on the Hill realizes that. Unfortunately, I suspect that a majority of Americans do vaguely suppose that there is something like a big safe with real money in it that the government taps to pay for things like this - kind of like believing that the Social Security Trust Fund is bundles of hundred-dollar bills stacked up in a cool, dry place.

Vice Chairman Carolyn Maloney (R-NY) asked if this proposal to intervene in the credit markets to the tune of $700 B would affect inflation and wondered if the Fed might have to raise rates. Bernanke said that this was not a stimulus. He said that if it helps the economy grow, the Fed may have to raise rates sooner, but the he did not expect it to have any effect on inflation. I'm speechless! Of course it's inflationary. I also have to wonder whenever I hear a comment like this, whether he actually believes that an expanding economy causes inflation - like some mysterious act of God - and that it is the Fed's role to counter that by raising rates.

He explained that this would not be an expenditure. He said it would be "acquisition of assets." If there is a loss, he said, it would be much less than $700 B. I think I agree with Ron Paul. We are basically trying to pretend that the real estate bubble never popped by saying that the debt instruments based on those inflated values still have value. Several legislators expressed their frustration over the fact that Hank Paulson added other toxic waste to the mix this weekend - car loans, student loans.

Congress is trying to add its own unique signature to this boondoggle. For example, there is talk of coming up with the money by placing a surcharge on those making over a certain amount per year (I think $1M). There is also a move to restrict the compensation of financial institution executives. Amy Klubuchar (D-MN), said, "There should be a limit on what you can make when taking our money." Bernanke said there has to be an incentive for risk taking. "For this to work," he said, "we need a wide range of participation. If we stigmatize institutions that participate, they won't participate." Jeff Bingaman (D-NM) suggested a $200 B tranche with Warren Buffett at the head of the board of some administering organization to "get these institutions functioning again." Bernanke noted that Buffett had invested $5 B in Goldman Sachs and that the Oracle of Omaha had said that we "go over the precipice if Congress does not act."

There was also a bright side to proposals from legislators. Kevin Brady suggested that Congress look at a holiday on the capital gains tax or temporarily lowering repatriation road blocks since taxes now make it too expensive to bring capital home from overseas. He noted that three years ago, $300 B came home when the tax barriers were lowered. Bernanke said these actions alone will not solve the problem. Again, I am not holding my breath - more likely that we will see exchange controls.

Representative Lloyd Doggett (D-TX) noted that although Bernanke says he will be "acquiring assets," he has asked Congress to raise the debt limit to do it and is acquiring the assets because they are toxic waste and we don't know what they're worth. "In Texas," he said, "we say ‘those chickens are coming home to roost.'" Then he thought better of it and said "vultures are coming home to roost." He said we have a bankrupt ideology. I'm not holding my breath waiting for taxpayers to get their $700 B back. Ron Paul later said that after Doggett's comments, he can't tell who the conservatives are.

As is often the case in exchanges with the Fed chairman, there was an emphasis on market psychology, not real sound money practices. The whole concern seems to be for creating the illusion of economic stability as if stability could not actually be achieved, so the illusion is the best we can do. For example, Schumer asked whether a $150 billion installment, with the rest to come later, wouldn't be enough to assure markets that Congress is serious. Bernanke agreed that it is about psychology and said $700 B is what the administration thought it would take to provide psychological reassurance. Representative Carolyn Maloney asked where he got that figure. He said it was not science. It's about 5% of the $14 trillion in outstanding residential and commercial mortgages, on which the loss rate is about 5 %. I couldn't help thinking that returning to the gold standard would certainly show the market that Congress was serious and would allow real financial planning instead of trying to guess at the unintended consequences of clumsy government intervention in the free market.

There was a lot of discussion of the technical aspects of getting banks lending again - putting taxpayers first, strong congressional oversight, enticing financial institutions, including foreign institutions, to participate in the auction of these troubled securities, fire sale vs. hold-to-maturity prices, the Fed paying a premium for them. Senator John Sununu asked if firms would be willing to sell at below book value. Bernanke said (apparently now agreeing with Ron Paul) that "over time there is no way to hide the real value of an asset." I think that was a "yes," but I found myself wondering whether the objective here isn't to pay above-market value for these securities with taxpayer's money. I think it is.

Bernanke said this is the most significant post-war economic crisis for the United States and the world. He noted the hardships for those on Main Street if banks can't lend - consumer credit dries up, car and small business loans are unavailable. Baron Hill (D-IN) asked Bernanke what he should tell his constituents who asked if their stock portfolios and 401(k)s were going to lose value. Bernanke said "yes," they would lose value if Congress does not act. He said the credit system is like plumbing that permeates the economy. He said choking credit takes the life blood out of the economy. That may be, but perhaps it should not be. It occurred to me that there are two components to interest: opportunity cost and risk of lost purchasing power. If you take away the latter, I think the credit system becomes quite simple and we don't have to go through all these contortions, and probably don't need the Federal Reserve. Inconveniently, the government would have to live within its means like the rest of us.

Bernanke said the pain on Main Street would be very significant if Congress does not authorize this plan. He urged Congress to solve this problem now and come back later and look at reforming regulation. As Representative John Shadegg said, however, you can't expect an arsonist to put out the fire he started. There is no way we are going to avoid pain at this point. It seems to me that each time Congress tries to avoid it, the inevitable pain gets worse. Let's bite the bullet and get it over with and for God's sake, no more regulation!

Jim DeMint (R-SC) said that unbridled capitalism is not at fault. He said this problem was caused by the government and its implied guarantee. He said we removed accountability for risk from the enterprise system and that this was a failure of government intervention, not a failure of the free market. Bernanke tried to clarify that he was not talking about heavier regulation, just reformed, smarter regulation - maybe even less regulation. I'm afraid I have evolved from a libertarian into an anarchist and find not the slightest comfort in those words. I was happy to hear DeMint point out that some of the institutions that Bernanke found too big to fail were government-created GSEs. He said that none of these programs support free-market activity. He noted that the Sarbanes-Oxley "monster" chased capital off shore but failed to tell us about Bear Stearns. He concluded that "no amount of government regulation will eliminate corruption if risk is removed." Bravo!

Rep. Phil English (R-PA) was troubled by the extraordinary power this proposal would give to the Treasury Secretary, an unelected official. He suggested that this was the path to "Crony Capitalism." I will add that the next Treasury Secretary will inherit this power and will not only be unelected, he or she has not even been named.

Rep. Maurice Hinchey (D-NY) observed that Bernanke and Paulson went to the White House with this problem last Thursday but had to have known about it before that. He wondered why Congress had been kept in the dark. Bernanke cited efforts taken to correct the problem, including the discount window, CDSs, and the market's natural healing process. Hinchey said he was skeptical in April when Bernanke and Paulson told the Committee that the economy was growing and that our financial institutions were healthy. He said there was motivation to keep this under cover and that we are seeing manipulations and distortions of the mortgage market. Bernanke cited the sharp interest rate cuts in January. Apparently he was still hopeful that they would work in April and did not want to alarm the Committee. He suggested that Congress "should look at substantial regulatory reform." He suggested a "1-2 punch. Stabilize and then fix it so it does not happen again." Again, I say that fixing it will take more than adjusting a few dials or fine tuning some regulations. The overhaul necessary to fix this I suspect no one on the Hill has the guts for except Ron Paul, maybe Tom Coburn.

In conclusion, I would say it sounds like this bailout may not be a done deal. Constituents are ringing phones off the hook, telling their legislators "don't do it." Many are suspicious that it came up so quickly and that they are being asked to act so quickly. Representative Mike Pence (R-IN) told CNN, "There are those in the public debate who have said that we must act now. The last time I heard that, I was on a used-car lot. The truth is, every time somebody tells you that you've got to do the deal right now, it usually means they're going to get the better part of the deal."

Always the optimist.

Regards, Don

More Views on the Bailout From the Washington Post...

During testimony before the House Budget Committee, Peter R. Orszag -- Congress's top bookkeeper -- said the bailout could expose the way companies are stowing toxic assets on their books, leading to greater problems.

"Ironically, the intervention could even trigger additional failures of large institutions, because some institutions may be carrying troubled assets on their books at inflated values," Orszag said in his testimony. "Establishing clearer prices might reveal those institutions to be insolvent."

In an interview later yesterday, Orszag explained using the following example: Suppose a company has Asset X, whose value is recorded on the books as $100. Because of the current economic decline, Asset X's real value has dropped to $50. If the company takes part in the government bailout and sells Asset X for $50, the company has to report a $50 loss on its books. On a scale of millions of dollars, such write-downs could ruin a company.

Such companies "look solvent today only because it's kind of hidden," Orszag said. "They actually are insolvent" already, he said.

From Ron Paul...

Dear Friends,

Whenever a Great Bipartisan Consensus is announced, and a compliant media assures everyone that the wondrous actions of our wise leaders are being taken for our own good, you can know with absolute certainty that disaster is about to strike.

The events of the past week are no exception.

The bailout package that is about to be rammed down Congress' throat is not just economically foolish. It is downright sinister. It makes a mockery of our Constitution, which our leaders should never again bother pretending is still in effect. It promises the American people a never-ending nightmare of ever-greater debt liabilities they will have to shoulder. Two weeks ago, financial analyst Jim Rogers said the bailout of Fannie Mae and Freddie Mac made America more communist than China! "This is welfare for the rich," he said. "This is socialism for the rich. It's bailing out the financiers, the banks, the Wall Streeters."

That describes the current bailout package to a T. And we're being told it's unavoidable.

The claim that the market caused all this is so staggeringly foolish that only politicians and the media could pretend to believe it. But that has become the conventional wisdom, with the desired result that those responsible for the credit bubble and its predictable consequences - predictable, that is, to those who understand sound, Austrian economics - are being let off the hook. The Federal Reserve System is actually positioning itself as the savior, rather than the culprit, in this mess!

The Treasury Secretary is authorized to purchase up to $700 billion in mortgage-related assets at any one time. That means $700 billion is only the very beginning of what will hit us.
Financial institutions are "designated as financial agents of the Government." This is the New Deal to end all New Deals.
Then there's this: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." Translation: the Secretary can buy up whatever junk debt he wants to, burden the American people with it, and be subject to no one in the process.

There goes your country.

Even some so-called free-market economists are calling all this "sadly necessary." Sad, yes. Necessary? Don't make me laugh.

Our one-party system is complicit in yet another crime against the American people. The two major party candidates for president themselves initially indicated their strong support for bailouts of this kind - another example of the big choice we're supposedly presented with this November: yes or yes. Now, with a backlash brewing, they're not quite sure what their views are. A sad display, really.

Although the present bailout package is almost certainly not the end of the political atrocities we'll witness in connection with the crisis, time is short. Congress may vote as soon as tomorrow. With a Rasmussen poll finding support for the bailout at an anemic seven percent, some members of Congress are afraid to vote for it. Call them! Let them hear from you! Tell them you will never vote for anyone who supports this atrocity.

The issue boils down to this: do we care about freedom? Do we care about responsibility and accountability? Do we care that our government and media have been bought and paid for? Do we care that average Americans are about to be looted in order to subsidize the fattest of cats on Wall Street and in government? Do we care?

When the chips are down, will we stand up and fight, even if it means standing up against every stripe of fashionable opinion in politics and the media?

Times like these have a way of telling us what kind of a people we are, and what kind of country we shall be.

In liberty,

Ron Paul

Quotes from the Quislings

Not to be indelicate, but the working title I had chosen for this next section was "FCUK YOU!"... that, by virtue of my feeling that strong words are in order for the quislings who purport to be free marketers and who have been lined up to support the government's bailout.

Here's my Rogues List...

Laurence Fink

BlackRock Inc

"If this plan works, taxpayers are not going to be out money," Fink, a pioneer of mortgage-backed securities, said in an interview with Bloomberg TV.

... Based on current prices, buyers of distressed debt, including the government, will earn "strong returns over the next five to seven years," said Fink, who declined to say whether his New York-based company will bid on contracts to manage the proposed Treasury fund.

And there's the well-regarded Mr. Buffett...

"I am betting on the Congress doing the right thing for the American public and passing this bill," Buffett said on cable channel CNBC today. "I certainly have a vote of confidence in Goldman and vote of confidence in Congress."

Of course, Buffett didn't mention how much money his company stood to lose if the government failed to rush into the breach. Or how much extra money he'd make by trading his good name to Goldman for a sweetheart deal that will form a footnote in all future books on financial topics... but only if the bailout goes through. Among other kisses, Buffett's coup includes perpetual preferred shares that pay a 10% coupon. Simply, that means if the U.S.G. bails out Goldman, Buffett will collect $500 million a year on his $5 billion investment, and his payments will come before those sent to any other shareholders. He also gets under-the-market warrants on another $5 billion worth of shares.

Goldman never would have agreed to this deal unless their feet were roasting in the coals of calamity. One can hardly blame Buffett for making his move (it's not like he couldn't withstand the loss of $5 billion, should the worst come to pass), but now that he is so handsomely positioned, his cheerleading should be viewed as the disingenuous self-dealing that it is.

And then there's this, from the Washington Post, quoting mega-bond manager Bill Gross...

"The Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street, as lending capacity and confidence is restored to our banks and the delicate balance between production and finance is given a chance to work its magic. Democratic Party earmarks mandating forbearance on home mortgage foreclosures will be critical as well. If this program is successful, however, it is obvious that the free market and Wild West capitalism of recent decades will be forever changed. Future economic textbooks are likely to teach that while capitalism is the most dynamic and productive system ever conceived, it is most efficient over the long term when there is another delicate balance -- between private incentive and government oversight."

On that last bit, I feel it's worth mentioning that Freddie and Fannie may have "enjoyed" more government oversight than any other two institutions on the planet.

If there is one certainty, and there are several related to this fiasco, it will be that the free market will be made the patsy, and the result will be a public outcry for more, not less government.

In the end, now that the government has broached the topic, the $700 billion is going to get spent... whether it starts by going into the pockets of the Wall Street, or is cycled back into the public pocket through the vehicle of FDIC guarantees, or making the money market funds whole, or giving millions of householders a free ride on their mortgages... or simply writing checks to consumers... it, and a lot more is going to get spent.

For my money, and it is my money (and yours), the best argument for the bailout was offered by none other than President Bush, who succinctly opined in a meeting yesterday of congressional leaders, "If money isn't loosened, this sucker could go down."

Unfortunately this sucker, aka the economy, is going down no matter what they do at this point.

At this point, all we can do is to wait and watch. Focus on liquidity for your personal portfolio and prepare for the worst. It's coming.

About Those Foreigners...

In all of the frenzy, the U.S. Government seems to be largely ignoring the foreign holders of our many trillions of dollars. This is also, as we have repeatedly said would be the case, because foreigners don't vote, and if they do decide to dump their dollars - as we expect they will (and actually are) - they will only hurt themselves. Or, so runs the logic of desperate policymakers, relying on MMAD (Monetary Mutual Assured Destruction) to rationalize their massive unleashing of dollars.

If you've voted for any of the clowns running our country for the last 40 or so years, you might want to take a moment to apologize to your children and, if you have them, your grandchildren as well. (Ron Paul supporters, you can take a pass on this.)

That's because, as I mentioned above, the U.S. Government has managed to squander the unbelievable advantage of being the suppliers of the world's de-facto reserve currency... an advantage made almost miraculous given that it was backed by nothing.

All the bureaucrats had to do was show even modest restraint and occasionally take a few moments to remind themselves of the principles of self-reliance and open opportunity that made this country what it is. Instead, the political class, cheered on by the voting public, fell in love with virtually every perfect-world social program, every new make work, corporate suck-up and pork barrel program waved in front of their snout-bedecked faces these many years. In the process, they have traded away something that no nation will again enjoy... a global blank check.

Bud Conrad is assembling the eye-opening hard data showing the trend reversal in foreign investment in U.S. dollar assets for the next edition of The Casey Report.

In the meantime, the anecdotal evidence is beginning to mount, an example being this item from MarketWatch this week..

HONG KONG (MarketWatch) -- Chinese regulators have asked domestic banks to stop lending to U.S. financial institutions in the interbank money markets to prevent possible losses during the financial crisis, the South China Morning Post reported Thursday. The China Banking Regulatory Commission's ban on interbank lending of all currencies applied to U.S. banks, but not to lenders from other countries, the report added, citing a source.

I don't need to tell you that the Chinese government operates on group-think. For an official arm of the government to take this step is a howitzer shot across the bow of the U.S. ship of state.

Meanwhile, the current administration has managed to almost entirely alienate the Russians with our persistent meddling overseas ("Avoid foreign entanglements," said George Washington and Thomas Jefferson. "Take over the world," answered a succession of modern politicos). Not shy about giving as good as they get, the Putinistas are moving game pieces closer to home ground.

The memorandum was signed on Monday in Caracas, as a Russian Navy squadron, including the heavy cruiser Peter the Great and three escorts, set sail from St. Petersburg to join Venezuelan vessels in the first show of Russian naval power in the American hemisphere for many years.

They have been preceded by the Russian Air Force, which dispatched a pair of long-range bombers to Venezuela for the past week. A Russian naval spokesman told Mineweb the squadron will operate in the Caribbean, and will enter the sea from the Atlantic Ocean.

And the official mouthpieces of the Russian government, this one from the Russian News and Information Agency, are firing torpedoes at the U.S. dollar. This excerpt from an article entitled "Time for a gold rouble" published yesterday...

Second, the Russian leaders might also consider making their own currency, the ruble, convertible into gold. The idea of gold convertible currencies is extremely unpopular among most economists; they dismiss gold as a "barbarous relic" (to use the famous phrase of John Maynard Keynes) and suggest either the present regime of paper currencies or, at best, a link to a basket of commodities.

Both these solutions are highly artificial and based on the same level of state control which has now just so spectacularly failed. Indeed, which is more "barbarous" -- the reintroduction of gold as an instrument of payment, or the practice of amassing huge quantities of the precious metal to keep it locked underground in the vaults of central banks? The contempt of the Keynesians notwithstanding, it is an indisputable fact that gold does remain the ultimate store of value, which is precisely why states own so much of it.

At this point, even our "friends" are starting to make excuses and reach for their coats. This from a Reuters report on the strong words falling out of the mouth of the German finance minister...

In some of the toughest language since the crisis worsened this month, German Finance Minister Peer Steinbrueck told parliament the financial turmoil would leave "deep marks" but was primarily an American problem.

"The world will never be as it was before the crisis," Steinbrueck, a deputy leader of the center-left Social Democrats, told the Bundestag lower house.

"The United States will lose its superpower status in the world financial system. The world financial system will become more multi-polar."

It is impossible to fully appreciate, let alone understand, the implications of the loss of the dollar's global reserve status... but it's a topic we'll be digging into. It won't happen overnight, but it will happen.

A Musical Interlude

For something a little lighter, I want to share some of the musical recommendations that were sent by readers in response to my recent solicitation.

Before getting to your recommendations, however, I'll tell you that today I have been listening, repetitively, to the soundtrack from "Once," an excellent film we watched earlier this week. Our own Louis James had first recommended it, followed by another friend, and so I thought I should check it out. It is a simple, beautifully executed, romantic little film... overlaid with powerful music.

The track I'm currently listening to is one of my favorites, "When Your Mind's Made Up." You can listen to it and see a scene from the film, compliments of YouTube, by clicking here. It starts slow, then builds to the point where it pretty much blows me away -- just the kind of music I love.

Okay, so that's my entry this week... now here are yours.

Explosions in the Sky

The Birth and Death of the Day

It's Natural to Be Afraid

All of a Sudden I Miss Everyone

My All Time 5 Favorites... Foo Fighters - Pretender - awesome video where they fight the riot police, btw...

KRS1 - Sound of Da Police ...

NWA - F*** Da Police

Pink Floyd - Another Brick in the Wall Pt. 2

Public Enemy - Fight the Power.

As you may have noticed, I like my music with a message... Music to overthrow your government by! Jeff B.

JS Bach's Toccata and Fugue

It is surpassed only by Hector Berlioz's Requiem, scored for full symphony orchestra, a double choir, and a brass band in each of the hall's four corners. Despite its title, it's a rouser! If you have a good sound system, open

http://www.youtube.com/results?search_query=berlioz+requiem&search_type=&aq=2&oq=berlio

Start with Requiem et Kyrie, and keep going. C V.

First off, the Isley Bros, in general, are hard to beat. For passion and purity of voice you gotta hear (the late, due to cancer) Eva Cassidy, not exactly rockin' music but well worth the listen. I was delighted to actually find recordings of her live performances on YouTube, though her best album was Songbird.

Other mentionables from assorted categories that are worth a listen and whom you may or may not be familiar with (we're about the same age) are Dan Hicks and His Hot Licks (hippie country rock), Zap Mamma (world), (the late due to dying) Shirley Horn (torch jazz), and early John Mayall (blues).

www.generalfuzz.net

Thanks for all the great insights so far. . . James

So here is my must have for you and maybe you are already enlightened... Yo La Tengo. Writing beautiful rock and roll for 20 years. Check Youtube "Today is the day" and listen to the live performance on John McEnroe's show. Then graduate to "Blue Line Swinger" It is a 9 minute song and the first time you hear it, by minute 4 and 20 seconds your foot will be tapping, the second time I think it will be tapping the whole time. John W.

Gypsy Soul

Obsession Confession

Slash

While speaking of songs that get me movin' (and STOP me from working), I might mention one called Orinoco Flow (Sail Away) by Enya. Sounds as if it would be rather staid if you know anything of her, but there again is something about that song... it got airplay at a time when I was training for powerlifting at some ungodly early time in the morning before work. Whenever that song would come on, I would have to wait to start my set, but I was awake and movin' by the end of it.

How about Classical Gas for a movin' song?

Country music provides the bulk of the really good guitar playing (and I honestly am not that impressed by most rock guitar playing). Roy Clark has been my favorite since I was a kid (although I don't really care to have him sing). And if they were to map my DNA, I believe they would discover a Boogie gene.

And on that note, give a listen to an Aussie flatpicking champion named Tommy Emmanuel.

Now back to work (me, not you). Matt B.

A tune that is a favourite of mine and in keeping with the problems at present (Chris Rea's Highway to Hell) (listen carefully to the lyrics) for your entertainment. Chris M.

David again, I have many more... and will try to cycle in your recommendations in future editions. But for now, time is running short and I need to move on. Thanks to all of you who have contributed... my musical horizons have been expanded.

McPalin Is Toast

This week I finally found the time to spend a little time, figuratively speaking, with Sarah Palin (encouraged by an article Doug Casey is preparing for The Casey Report on McCain's surprise running mate).

I have to say, I was pretty shocked. As I think many Americans will be, as they watch the candidate in action in the weeks just ahead.

The following quote is from Palin's interview with Katie Couric, in response to a question on the bailout.

"That's why I say, I, like every American I'm speaking with, we're ill about this position that we have been put in [fumbling for words to continue] where it is the taxpayers looking to bail out. But ultimately, what the bailout does is help those who are concerned about the healthcare reform that is needed to help shore up our economy. Um, helping, oh -- it's got to be all about job creation too. Shoring up our economy, and putting it back on the right track. So healthcare reform and reducing taxes and reining in spending has got to accompany tax reductions, and tax relief for Americans, and trade, we've got to see trade as opportunity, not as a competitive, um, scary thing, but one in five jobs being created in the trade sector today. We've got to look at that as more opportunity. All of those things under the umbrella of job creation. This bailout is a part of that."

Huh? What?

Listen, I know there are McPalin supporters out there and, I will say it again, strictly from a personal perspective - i.e., I really don't want to pay any more taxes - if I were forced to pull a lever, it would be for McCain (because a victory by him would mean gridlock, that glorious state where the government's power to "do good" is curtailed). So, don't get angry or send me emails accusing me of being some sort of commie-sympathizer or member of the left-wing media conspiracy.

I'm sure Sarah Palin is a perfectly wonderful person, but she is way out of her league here. And, shortly, the boomerang effect of her media appearances is going to smack McPalin upside the head.

If you don't believe me, watch the following excerpt from the Couric interviews, this one on Palin's purported experience in foreign affairs. (You may have already seen this, because it's starting to make the rounds on the net... which is exactly the problem.)

At this point, I can't see any conceivable way McPalin wins. Which means, get ready for a serious asset stripping come next year.

Miscellaney

Phyling On

phyle

In any event, Herb in Jacksonville, FL is looking to start a phyle.

And the next meeting of the Sacramento phyle is scheduled for September 30th with Ron Parratt of AuEx (one of my favorite explorers) as a guest participant.

And the Toronto group, one of the most active, will be held on October 3... with our own Doug Casey sitting in.

For more details on any of these get-togethers, or any of the other phyles now up and running (this is all happening organically, by the way... all we're doing is facilitating the introductions of the new members to the organizers), contact Kristen at phyle@caseyresearch.com.

Well, that's all that time allows for today. It has been a long and immensely interesting week. We are living through a crisis of a magnitude seen only once a century. While one might take satisfaction by being able to say "I told you so" to sundry friends and associates - you know, the ones who have habitually rolled their eyes and parroted the "all is well" mantra of the financial talk show hosts whenever you have tried to warn them about what's coming... the reality is that these are dangerous times. Even for the prepared.

So, be careful. Especially when discussing topics related to wealth and precious metals ownership. Those who "have" could easily become targets for those who "have not" as this crisis unfolds. Mum's the word.

As I sign off, stocks are largely flat and precious metals are up nicely, to $888. If I were to guess what's going to happen next, it will be that an agreement on the bailout will be announced, the stock market will have another dead-cat bounce... after which it is going to start on a sharp slide.

As always, I greatly appreciate you using some of your valuable time to read this column, blog, musings - whatever it is. Your comments and suggestions are always welcomed, and often directly responded to, by writing david@CaseyResearch.com.

A final note. If you have friends who you think might benefit from our service, we would take it as a great favor if you'd tell them about our services and suggest they take us up on our 3-month no-risk trial subscription for The Casey Report. The next three months should be particularly important, so now's the time to act. You'll be doing them a favor, if for no other reason that our analysis is unbiased because it is beholding to no one except you, our subscribers.

As for the money managers and other talking heads now cheering for the bailout versus warning the people who listen to them to run for cover... well...

I'll leave it at that...

Until next week,

David Galland
Managing Director
Casey Research, LLC.

The Room 3/10/08

David Galland — Mon, 10 Mar 2008 16:16:14 GMT

Dear Fellow Global Adventurers,

This past week I came across worthy comments from Dr. Marc Faber of the Gloom, Boom & Doom Report in which he comments that, by continuing to cut interest rates, Bernanke will eventually "destroy the U.S. dollar."

If Bloomberg is reporting accurately, and I see no immediate reason in this case to doubt them, Dr. Faber also said...

In the U.S., they pursue essentially economic policies that target consumption, which in my opinion is misguided. They should pursue economic policies that stimulate capital investment and capital formation.

We share Dr. Faber's sentiments on the outlook for the dollar. And his thoughts on how to solve the many challenges facing the U.S. economy resonate with us here at Casey Research, as well.

The fly in this otherwise pleasant and lightly scented ointment, however, is that -- thanks to the nature of democracy and even humanity's shared psychology -- Bernanke is powerless to take Marc up on his common-sense recommendation. In my opinion, the Fed is left with no course of action but to destroy the dollar.

I say that due to the mechanical aspects of Marc's suggestion. You see, in order for the government to stimulate capital investment and capital formation, it would have to greatly reduce the weight of its own dead hand on businesses and individuals.

There is a saying that capital flows to where it is best treated, the veracity of which can be proven by considering that on the order of 25% of the world's construction cranes are currently deployed in Dubai. And that city has no real resources of its own; it's located in the most geopolitically unstable corner of the globe, and has a physical climate that is measured only in terms of hot, really hot, and even hotter.

Properly restructured, the U.S. could, at the risk of sounding nationalistic, kick Dubai's butt. And China's as well.

After all, while many of the world's economic observers fawn over China's remarkable progress, the facts are simple. (a) The U.S. already has the infrastructure in place that China is now trying to build; (b) China is run by a cadre of corrupt communist comrades, not exactly a model ripe for emulation by a thinking person; (c) they have over a billion mouths to feed. Which is to say, any setbacks that cause the aspirations of its large public to be disappointed could result in social unrest and worse. (The rocketing cost of rice, up almost 100% over the last year, may be a catalyst for such unrest.)

Adding to the discomfort about the potential consequences of social unrest, one only needs to glance casually into the cupboard to find tightly packed examples of the culture's apparent disdain for steadily beating hearts.

Reaching into said cupboard, we pick up Barbara Tuchman's excellent Stillwell and the American Experience in China to read her accounts of General "Vinegar Joe" Stillwell's arrival in that country in the support of Chiang Kai-Shek, as despicable a two-legged creature ever to have wandered onto the human stage. In between other duties, Joe had to restrain himself, and his men, from opening fire on officers of Mr. Kai-Shek's nationalist army that would routinely punish the loss of even so much as a single lice-ridden blanket by a foot soldier with summary execution.

But as degraded as Chiang and his fellows were, they were nothing compared to the big guy himself. Based on readings on the topic, confirmed with an airplane seat consultation with an academic who had made the study of such things his life's work, Chairman Mao was reliably responsible for the unnatural deaths of over 50,000,000 of his fellow countrymen.

I digress.

Returning to my theme, the U.S. has everything it needs to be more than competitive on the global stage. All that needs fixing, really, is to eliminate the single largest obstacle to capital formation, the heavy weight of government. To be metaphoric, it is hard enough to successfully climb the mountain of capitalist endeavor -- having to do it with a large sack of rocks weighing on your spine greatly reduces the odds of success.

There are many ways that this reduction in the weight of government could be accomplished. A well-timed nuclear backpack going off in the nation's capital pops to mind. But such a solution would only be temporary and would lead, unquestionably, to a Hydra-like regeneration of even more and bigger government in its place.

No, the far better approach would be to put the institution on a strict regime. To treat the government the way a heartless physical fitness coach might, whose lunch money is entirely dependent on his client losing all but the essential ratio of body fat.

Personally, I can see no better way of getting right down to it than by anchoring spending by reinstituting a gold standard, then tossing out the entire tax code in favor of a level tax of 10%. (With the amount of wealth that would be created, forgiving even that burden for the true unfortunates would be of no fiscal consequence.)

In addition to providing a welcoming home for capital, among the many other advantages of making these moves, would be; (a) the elimination of the Fed. With no need to "manage" the currency, their disastrous reign over the world's money supply would come to a quick end; (b) the elimination of the horrible waste and costs associated with tax preparation, estimated to be a minimum of $150 billion a year, before taking into account all the personal time and worries that go into the current process; and (c) the government would be forced to be far more selective in its pursuits and to curb its unceasing expansion plans.

Making a necessarily loose calculation and using the current economy for same, a gold standard and flat tax together would require the government to live with a budget of about $1.38 trillion per year, requiring a substantial reduction in the $3.1 trillion it is projected to burn up in 2008.

But the reality would be not quite so stark, as the tax receipts would soar in the new economy as the world beat a path to set up to do business in the U.S.

There's just one problem with that practical, though utopian, view.

Which brings us back to the nature of democracy and the psychology of humankind. While the votetariat may talk a good game, when it comes right down to it, the majority is interested in seeing its favorite uncle not spend less but more.

More on health care. More on fighting global warming (or cooling, whichever idea has the most traction at the moment). More on bailing out subprime borrowers and lenders alike. More on the social security net. More on FDA inspections, more on financial regulation, more on building bridges and more on commissions to study the drug habits of professional athletes. Some want more money for Homeland Security and war, others want more money for foreign aid to this or that country or to protect pygmy elephants as they meander through dark jungles on the other side of the world.

Not very long ago, my own dear mother provided illumination on the topic when she told me that she, who had been a big Ron Paul supporter, had retracted her support after hearing him comment to the effect that he would, as she put it, "eliminate my Social Security."

And there's something else. The Germans have a word, Schadenfreude, which loosely translated means taking pleasure at seeing others fail. The tightly linked obverse of that sentiment is that we take umbrage when someone succeeds a bit too much.

Consider the indignation in some circles at Bush's "tax cuts for the rich"... tax cuts that will almost certainly fade away into the darkening horizon as the next administration comes to power.

But tax cuts for the rich... or, more accurately, those who aspire to wealth and succeed in gaining same, is exactly what the country needs to power through the looming crisis.

What the country doesn't need, really, is to keep depreciating the currency. What will it take for the average voter to wake up to the reality that the U.S. dollar has lost 81% of its value since its link to gold was cut in 1971?

If things continue on the current flight path, which is pretty much headed straight at the ground, we may soon find out.

The Right Way to Look at the U.S. Economy Today

[click to enlarge]

In the lead article of our December 2006 International Speculator ("Users Guide to Fiscal Calamity", view archives) we pointed out that the 20-year bubble in financial assets was only temporarily and lightly deflated in 2000, as the Fed's money pumping shifted the asset bubble to the housing market.

As a consequence, going into the current crisis, the long bubble was not only intact but larger than ever.

In the wee hours this morning, in between arranging his shirts and socks for a 6:30 am departure for a look-around of China, our own Bud Conrad somehow found the time to throw together the chart above, updating the data on the asset bubble.

If you step back from the chart, squint at it slightly, and use the power of your mind to add the two lines together, one representing equities, and the other housing... then mentally assign a net asset value to both... what you come up with is a clear road sign that the bubble still has a long way to go in a collapse, and that the collapse has begun.

Confirming that point, as I was writing this, the news came across the screen that U.S. payrolls contracted again in February, the second month in a row, and the most in five years. Understandably, the stock market is again in a free fall.

This is all but a continuum at this point. Yesterday, for instance, we learned that, collectively, the equity in American homes is now less than the debt owed on those homes. This is the first time this has ever occurred, or at least since the Fed started tracking that data in 1945. It is no wonder, therefore, that foreclosures and "walk-aways" are also breaking all the wrong records.

Rushing about trying to keep the wall from collapsing on top of the economy, the Fed announced today that it will further ramp up the largely indiscriminate, cut-rate lending it is making available to the banks, indicating that any hopes for a more intelligent approach to sorting things out will go unfulfilled.

Desperate Acts - Continued

On the topic of desperate acts, in recent editions of these musings, I have pointed to attempts by the bureaucrats to maintain the status quo by paying off bank employees in tax havens for client lists, selling off state lotteries and closing parks, etc.

On that general theme, this week provided additional examples:

The first entry is from Jubak's Journal, which appears regularly, it seems, on MSNMoney.com...

The Pension Benefit Guaranty Corp., the government agency that protects the pensions of 44 million workers in case their employers can't (or won't) pay promised benefits, has announced that to avoid going bust it will double the percentage of its portfolio -- to 45% -- that it puts into stocks. An additional 10% will go into alternative investments, including hedge funds.

In other words, facing a $14 billion deficit and even larger projected shortfalls, the Pension Benefit Guaranty Corp., or PBGC, decided not to save (by raising premiums) or to live within its means (by cutting benefits) but to gamble in the financial markets by taking on more risk. The PBGC was so proud of its new strategy that it announced it on Presidents Day, when the U.S. financial markets were closed and almost no one was paying attention.

While Mr. Jubak is to be thanked for bringing a little levity into the day, his indignation misses a key point. It's not as if they are actually betting with their own money. Even a complete wipe-out of the organization's remaining capital would be papered over with a quick press release that the government has had to step in and bail it out. People will shrug off the news, if they even notice it, as just another billion here, a billion there.

Unlike them, I view these billions as just more bricks in an increasingly rotted and dangerously tipping wall.

The second item comes from Bloomberg...

Jefferson County, Alabama, in a move that may cost it $184 million, said it wouldn't pledge reserves against $5.4 billion of interest-rate swaps tied to sewer debt that its bankers may demand.

...The county, which includes Birmingham, confronted a March 7 deadline to put up the $184 million in collateral or buy insurance to meet its obligations to JPMorgan Chase & Co. and three other banks on 13 swaps after S&P and Moody's Investors Service began downgrading the sewer debt last week.

"The county commission faces difficult decisions on the sewer system debt. However, these decisions will not be made at the expense of the county's employees," Jefferson County Commission President Bettye Fine Collins wrote in a memo to the workers.

I love Bettye's unusual candor... no question where her loyalty rests. Destroy the county's credit rating? Blow off $184 million? No sweat. But cause any expense or discomfort to the county's employees, no way.

Energy Chart of the Week

Last year showed both the promise, and the problem, with liquefied natural gas (LNG) imports to the United States.

[click to enlarge]

The promise is that rising LNG imports will offset dwindling natural gas imports coming down the pipe from Canada. Alberta, especially, will consume a much greater proportion of its own natural gas production to extract and upgrade their massive tar sands resources. With an emerging global market in LNG, a drop-off in regional supply shouldn't matter, or so the conventional thinking goes.

The problem is that the rest of the world is clambering for LNG as well - and they're willing to pay higher prices for it. In the first half of 2007, the U.S. was able to track down a number of cargos and imported a record amount of LNG. Then, a minor earthquake forced the Japanese to shut down a nuclear plant, and they had to rely on natural gas-fired power plants to make up the shortfall. In their desperation, Japan outbid nearly everyone for LNG cargos, and U.S. LNG imports plummeted. There was no sense in paying $12/MMBTU for LNG, when natural gas in North America cost nearly half that.

There are five regasification terminals for LNG in the Lower 48 and lately two of them have been sitting idle. LNG imports are still very low in the beginning of 2008. Last year, LNG imports averaged 45 Bcf per month, but in the first two months of 2008, that's down to 21 Bcf per month. Discouraging news for consortiums working to build more of these very expensive and very controversial regasification LNG terminals.

The wild fluctuations in LNG imports to the U.S. in 2007 demonstrated that until prices within North America go much higher, the U.S. will not participate in the global LNG market. The idea that LNG will flood the U.S. natural gas market with new supply and keep down prices is ludicrous.

North American natural gas prices will rise - as they have been for the entire decade - until it makes economic sense to go out and compete with the likes of Japan, Spain and others for expensive LNG cargos. By keeping an eye on LNG prices, we can gauge where domestic prices are headed. LNG prices are, in that sense, a leading indicator of domestic natural gas prices ¬- and, with the inevitable corrections along the way, they point to a future with natural gas prices of well over $10.

[Ed. Note: On behalf of subscribers, the team at the Casey Energy Speculator, which includes Dr. Marc Bustin, by well-deserved reputation one of the world's top unconventional oil & gas specialists, have been very closely watching the natural gas sector, including developments with LNG. If you want to know what they know, and their latest recommendations to profit, simply take the monthly service (complete with weekly online updates) for a test drive today. An unquestioning 3-month, 100% money-back guarantee assures your satisfaction. Check it out now.]

Bootstrapping It

Were you to place the America of today on a scale with the America of yesteryear, there are a number of measures by which the current model would fall short. At least if I was the one doing the weighing.

Consider, for instance, that in his time, which was the early 20th century, H.L. Mencken was, by a wide margin, the most popular newspaper columnist in the land.

For those of you who haven't yet had the pleasure of reading his writings, I would suggest you run, not walk to the nearest book store to pick up a collection. My personal favorite is the Vintage Mencken as assembled by Alistair Cooke.

Meanwhile, to tide you over, here are a couple of a multitude of his many quotable quotes...

"In the United States, doing good has come to be, like patriotism, a favorite device of persons with something to sell."

"It is inaccurate to say that I hate everything. I am strongly in favor of common sense, common honesty, and common decency. This makes me forever ineligible for public office."

There was another author from earlier times, one Horatio Alger, Jr., who was wildly popular in the 19th century based on his many dime story novels, mainly about scrappy lads who managed through honesty and hard work to fight their way out of poverty and into the proverbial mansion on a well-sited hill. (That he had a base predilection for the same scrappy lads failed to dent his popularity, it seems.)

This comes to mind because of an article Doug Casey thought you might enjoy. It is the story of a young man with everything, who decides to test the American dream by dropping out of his usual society, ignoring his material advantages, and with just $25, to try and attain some modest level of financial stability.

While some of you may be tempted, after reading the article, to catalogue the various reasons why the young man was a success, while others less fortunate at birth would be doomed to fail, I think the mere act of making that catalogue is wrong-headed. What the world needs these days, in my view, is a lot more of the "can do" attitude, and a whole lot less of the helpless victim mentality that so unprofitably grips the minds of such large swaths of current society.

In any event, here's the story...

Eye on Liechtenstein

Kevin Brekke, our Switzerland-based editor, has been helping us keep an eye on the developments in Liechtenstein, a canary in the coal mine, as far as we are concerned, for the outlook for financial privacy. Here's his latest report...

Hey David,

Well, as the news cycle exerts its influence on the Liechtenstein Event, like gravity it has pulled the story from the front page, to the back page, to off the page. But here's what we know (or what the media would have us think we know) as of Thursday, 6 Feb:

In true fascist government style, German politicians were clamoring for microphones and face time in front of the cameras to pound their collective chests with, as one newspaper caption put it, "true pride in their actions." I guess in Germany under the Merkel & Co. regime, coercion, bribery, and buying stolen property is considered praiseworthy. In any case, it was announced that close to 200 Germans had come forward and were cooperating with the tax authorities.

The scope of interest has also been revealed to encompass not just bank accounts in Liechtenstein, but also family and company trusts, and safe deposit boxes. The tax authorities were quite clear in their charge that anyone with cash in a foreign bank safety deposit box must be doing something illegal. Apparently being in possession of your own money outside your home country confers upon the citizen a verdict of guilty - guilty of what we don't know, but guilty nonetheless. And besides, it's so much more profitable and expedient to exercise habeus grabus than to ask questions and uncover the facts.

Not surprising was the piling-on of other socialist countries drooling to get their hands on a piece of this action. Greece, Italy, Spain, Portugal, Sweden, Great Britain, Ireland, and of course France, all expressed keen interest and deep concern to expose their own tax miscreants in the pursuit of "social justice." So pathetically desperate is Britain that their tax minister has announced that they will pay 100,000 pounds for a similar DVD with the names of British account holders.

In all fairness, there was a bright spot in this otherwise dark episode. A few clearer heads managed to elbow their way to the mic and interject some legal and ethical ponderings upon the shouting mob, er, the media. Sweden and Great Britain said that although they will pursue individuals to recoup tax revenue, they would likely not be able to bring criminal charges to bear, as the information was obtained via a crime - theft. Oh, those pesky details. The standouts so far have been Finland and Denmark. They took the argument further by saying that the theft of goods should not be rewarded - it's neither ethical nor legal.

More as it develops...

And That's It for This Edition...

It is an absolutely stunning day outside, and I swore to our production team that I would get this missive to them early, so I am going to line up both of those objectives and sign off now.

But first, a couple of quick housekeeping announcements.

Our Casey Research Crisis & Opportunity Summit is completely sold out. If you happen to come across a link to the event, please ignore it because we simply won't take any more registrations.
Based on subscriber feedback, we are going to re-double our efforts to tighten up the length of our monthly publications to no more than 24 pages. That said, knowing how prolific our team is, I suspect you'll be receiving additional special reports in between editions on topics that catch their collective eyes and that benefit from more in-depth exposition.

As is my custom, a quick check of the screen reveals that gold is hovering around $975, which is almost $200 higher than the average realized price of gold sold by Kinross Gold and other producers in producing their highly profitable Q407 financial results (to wit, the next quarterlies will only be better).

I also see that the DJIA has broken fairly decisively below the 12,000 benchmark. It's going lower.

Until next week... thank you very much for reading.

David Galland
Managing Director
Casey Research, LLC.

The Room 2/25/08

David Galland — Mon, 25 Feb 2008 20:20:26 GMT

Dear Readers,

Much to talk about this week. Too much, I fear.

I shall, therefore, endeavor to be succinct, a trait, unfortunately, that I seemed to have misplaced in my formative years.

Even so, as I like to believe that humankind possesses an innate ability to better themselves, I shall buckle down post haste and give it the old school try.

Hey, How 'Bout That Gold?

While it's nice to see things going along so swimmingly for our favorite form of money, even I am a little breathless after gold's surge to yet another record this week. And its kissing cousin, silver, has been no slouch either.

But I am not surprised, given that the precious metals are doing what they are supposed to do. Namely, reacting to the rising tide of inflation now beginning to make itself known here in the U.S. and around the world. This past week, we learned that even the Comedic Politicized Inflation index (CPI) is beginning to slip the leash. As you can see in the chart below from Shadow Government Statistics (shadowstats.com), which tracks inflation the good old-fashioned way -- i.e., the way it was done before all the jiggering - the actual rate of inflation is in a steady upward trend. It is only going to get worse from here.

[click to enlarge]

On that front, we have been surveying global inflation and finding that, with only few exceptions, the trend I brought to your attention last week holds true... the inflation the U.S. is experiencing is, indeed, worldwide.

That is not to say that there are no deflationary pressures, there clearly are. Much of which is related to the declining net worth of homeowners whose inflated real estate values are headed in the wrong direction.

The result, we believe, will be akin to one of those television commercials where you have, say, a truck carrying chocolates colliding with another carrying peanuts... followed by a smiling bystander, covered in the accidental mix, licking his lips and finding the formula entirely to his liking.

Except that the stagflationary sludge which is coming next - faltering economies concurrent with higher prices -- will be to almost nobody's liking. Unless, of course, you are smart enough to take the necessary precautions and position yourself to profit. That you are reading this is highly suggestive that you belong in that category.

Here Comes the Gold Stocks

While there are a number of reasonable explanations as to why gold stocks have been lagging, I have come to believe that the single most important reason has to do with the fact that the price of gold was still under $280 as recently as January 28, 2002.

Against that number was a cash cost of around $250 per ounce, which was about as low as it could go, on the average, indicating an industry doing everything it could just to survive. Put another way, as a result of the 20-year bear market up to that point, the industry had been beaten down about as far as possible. Therefore, as gold began its upward move, it did so against the backdrop of an industry in mothballs, running on a skeleton staff and highly optimized operations.

This is important on a number of fronts.

Having been trained in the acid bath of razor-thin margins, gold company management teams were intensely skeptical about gold's rising price. They assumed it would be just another bear market trap, ready to punish unwary optimists who went out on a limb by spending money to ramp up production.
I used the phrase above "highly optimized operations." By that I mean the mines were focusing only on the easy-to-mine, higher-grade material that would allow them to produce a return... maybe. It also meant they were extremely frugal, reluctant to buy new equipment, or hire the bare minimum of employees.
Another survival technique was the selling of future production at a set price, a perfectly rational exercise in a bear market, because it at least assured a price that would cover the known costs.

When you add all that together, especially the inherent skepticism of management, it becomes easier to understand why it was that the industry was slow to act even as the gold price started moving up. In fact, it was only in February 2003, with gold trending over $350, that Barrick Gold Corp., the world's largest, began the expensive process of unwinding its hedges. And it wasn't until November of that year that the company announced it was foregoing forward sales altogether and would work to bring its hedge book back to zero.

At the point that the industry realized that the bull market in gold was for real, it started to scramble to play catch up. Which, in a choo-choo industry like mining, means hiring and training lots of people, buying and refurbishing the equipment needed to reestablish production on more marginal deposits, upgrading facilities, building expensive new mills, etc., etc. And, of course, dealing with the cost of unwinding hundreds of millions of forward hedge contracts.

The rebuilding of the gold mining industry, in short, really only began in earnest over the past few years. As would be expected, the costs associated with this rebuilding required big hits to the financial metrics that institutional investors look at before making an investment decision.

The metrics were not helped by the shift away from high-grade ore (the lower the grade, the more the material you have to process)or generally rising inflation and a falling dollar. The end result was that the cash cost of production rose by as much as twice what it had been during the mothball years, keeping the margins tight and the miners unattractive as investments.

By contrast, the base metals companies bottomed much earlier, in late 1998 and the first quarter of 1999, thanks to increasing demand out of China and elsewhere. As a result, they were well on the road to recovery when the big price increases for base metals began in 2004, positioning them to make free cash flow hand over fist. Thus, while the gold miners have been largely shunned in recent years, the base metals sector has been enjoying salad days, reflected in multi-billion mergers and acquisitions and, of course, sharply higher share prices.

Here at Casey Research, we are of the firm opinion that now that the worst financial aspects of restarting their industry are behind them, the big gold companies are poised to take off. Proof of this point should come in rapidly improving margins which, lo and behold, we have begun to see in the quarterly reports now being released. Just this week we have learned that Goldcorp's profits almost quadrupled last quarter, Barrick's net profit rose by 28% last year and is expected to build rapidly from here and Kinross has just posted a record quarter, with profits up almost three-fold over the same quarter a year before.

The exception to the pack was an announcement that Newmont lost $933 million in the last quarter. But even there we find confirmation, because the loss was mainly associated with a one-time write-down of costs associated with acquiring new reserves and closing down an unprofitable merchant banking operation. In sum, Newmont took the write down because they could afford to, and because the high price of gold would help mute any investor disappointment. In essence, they have effectively cleaned up the books in order to join the profit party.

We will not long be alone in noting the pending improvements to the bottom line of the big gold companies... the investment herd is coming and, we expect, coming soon.

Now, I am going to dig down one more layer to make a couple of points you may consider blatantly commercial. Be that as it may, I'm not going to shy away from making these points simply because Casey Research will benefit if you take the action I'm going to recommend.

The first point I want to make is that if you don't already have a subscription to BIG GOLD, now is the time to take one. Our number-one pick, Kinross Gold, has already bucked the trend by moving up over 68% in the last 9 months, but the show is just beginning. The underperforming big gold companies and the new producers we are following, are going to catch up in a big way and soon. If you haven't yet subscribed, do yourself a favor and do so today. You can subscribe today for just $79 a year, and your subscription comes with a 3-month, 100% money-back guarantee, so you have less than zero to lose.

Click here to learn more about BIG GOLD and to subscribe.

The second point I need to make has to do with the junior exploration companies.

History has proven that, other than discovery stories, the big gold stocks need to get in gear before the investor sentiment reaches the critical mass needed to spill over into the junior sector. History also shows that, as profitable as the big gold companies are in a bull market, the returns offered by the juniors can blow those away. Exponentially. This upside, of course, comes with a greater degree of risk.

As the existing subscribers to the International Speculator will attest, these stocks can move down just as fast as they can move up... but if you have the tolerance for volatility and invest only with money you can afford to take a 50% (or more) haircut on, then you absolutely have to take a subscription today, while the bargains are still available. Again, we offer a discounted new subscriber rate and a 3-month guarantee... meaning you lose nothing by giving it a try.

Click here to learn more and to sign up for a subscription to the International Speculator now.

If you have the means, you really should have both.

While that may be the most blatant pitch I have ever made in this missive, I hope you can appreciate that I believe every word.

In fact, I have never been more bullish on the gold stocks in my life. That doesn't mean I'm right, but you can rest assured that I am completely, entirely sincere. We have a great team here, all of whom work very, very hard to get things right. Which, generally speaking, we do. Right now, the single best recommendation I can give you is to get very serious about your gold stock portfolio. Know why you own each stock you do, and don't bet the family farm, but be bold and the payoff should be truly extraordinary.

I don't think we are going to have long to wait for the show to really get on the road.

Spy vs. I

An outraged instant message from Fitzroy MacLean of Without Borders, our international investment and lifestyle letter, popped up on my screen earlier this week. Now, given that Fitzroy used to earn his porridge by engaging in covert and overt operations where a failure in risk management could lead to a bullet in the head (he is former CIA and an Army Ranger), he is not easily flapped, so his strident message caught my attention.

He was writing me from Germany where the news had just broken that German intelligence officers had paid on the order of US$5.9 million to a Liechtenstein bank employee to steal a disk containing the names of all the German account holders of the bank (and, I suspect, everyone else... giving the German government a very nice trading card). The purpose, of course, was to crack down on anyone who had been trying to avoid taxes by stashing funds in that tax haven.

Now, unlike Fitz who was appalled that the country's intelligence services were being put to work spying for the tax department, some of you may think that it is good and proper that the tax cheats are being rounded up and hauled off to the cells. If so, then you'll have much to cheer you in the months and years just ahead.

The fact is that governments in all their many permutations are themselves starting to feel the pinch from their overspending and overcommitting to spend more. The pinch will turn to a vice grip as the flaws of the fiat monetary systems they uniformly deploy begin to collapse as they futilely try to keep the *** from bursting.

In the United Kingdom, for example, the government has made the decision to nationalize the failed Northern Rock bank at a cost of almost US$7,000 per citizen. And in Germany, you have a bailout now approaching US$2 billion underway for the 1KB bank.

But this is only so much kinder-play when compared to the U.S., where the banks have been lining up around the block to take advantage of the Fed's Term Auction Facility (TAF). Which is to say, the banks are handing the Fed a bunch of toxic waste as collateral and receiving, in return, tens of billions of freshly minted dollars at a very agreeable interest rate.

And even that doesn't begin to measure up against the $170 billion of handouts contained in the stimulus package.

Which pales in comparison to the larger 2008 budget deficit, now estimated to be over $400 billion.

But all of that is only a splash on the rim of the bucket against the tens of trillions of bills now coming due for the benefits due the retiring baby boomers, a number sure to go higher when President Obama rolls up his well-pressed sleeves to implement universal healthcare... and... and...

The pressure is beginning to be felt all the way down the chain. In California, Governor Schwarzenegger attracted a lot of unhappy attention by suggesting the state start letting criminals out of jail, cutting welfare and closing down public parks and other facilities because that once golden state could no longer afford the bills. Here in Vermont, the governor has proposed selling the state's lottery to raise some pocket cash.

Make no mistake, we are still in the early, more friendly phase of this process. Once the state really starts to come under pressure, it will do whatever it takes to keep afloat.

A relevant comparison, sadly, comes from ancient Rome. During his unhappy term in office, Roman Emperor Caligula first spent the treasury dry, then, after it was depleted, turned to doing whatever it took to keep the state afloat. Which, at that time, involved - among other activities - accusing the wealthier citizens with treason followed by a speedy trial ("Hail Gaius! You're guilty, off to the lions with you. Have a nice day!") and the confiscation of all their property. As things slipped further down the slope, he passed into law incentives whereby friends, relatives and fellow countrymen of said property owners could rat them out, for which they would receive a cut of everything confiscated. And, one would imagine, as a bonus get a front-row box seat to watch the lions eat.

Expect to see more and more of the sort of covert activity engaged in by the Germans spread around the globe. We are at the beginning of the trend, not the end.

Watch yourself.

And Now for Something Entirely Different

As you know, at this point we are avoiding traditional equities (except to short some), and have no interest in fixed income. But we are birds of a different color than most investors, being determined contrarians with a solid speculative bent.

For those of you who skew a bit more toward the traditional, you might appreciate reading some of the material put out by Fidelity Independent Advisors. Olivier Garret, our CEO, and I met Fidelity's Don Dion at a conference last year and were impressed. While I personally wouldn't rush into some of the sectors they follow, you might be more inclined in that direction. If so, check out their free Hotline e-letter by clicking here...

Energy Chart of the Week

By Chris Gilpin
Contributing Editor, Casey Energy Speculator

[click to enlarge]

For the past three years, there's been an unusual divergence between the prices of oil and natural gas. Historically, the price per unit of energy between the two fuels is roughly equal. It might swing apart during cold winters when natural gas prices sometimes spike, or during times when political tensions in the Middle East put a "terror premium" on crude prices, but all things considered, they usually fall back into alignment.

That's because several large industries, and some power plants, have the capacity to switch back and forth between the two fuels. With crude costing twice as much per million British thermal units (MMBtu) as natural gas, you can rest assured that no one is burning petroleum products to power their operations or feed the electricity grid, not if they can possibly help it.

This widening price gap poses a pressing question: is oil overvalued, or natural gas undervalued? Both, is the most likely answer.

What's most fascinating is that this graph also clearly shows that the price of energy per unit - no matter what the fuel source - is rising sharply, proof that the global energy boom is in full swing.

(Ed. Note: If you are looking to get in on the energy boom, that is a sector we follow. You can learn more about the Casey Energy Speculator by clicking here.)

The Mailbag

I had any number of interesting reader emails this week. Here are excerpts from a few I thought you'd find of interest...

"You recommend highly speculative stocks. Given the respect you carry in the industry and the size of your readership, I am concerned about the timing of when you believe it is time to get out of the precious metals. I wouldn't think your exit would have much of an effect on gold or silver, per se, but I would like your honest and transparent belief over how much your "sell signal" will affect those small and highly speculative precious metal mining companies. I think it will be substantial, and frankly, I believe this precious metals bull market may last a lot longer than you seem to think from your writings. I don't want to be caught holding the bag, waiting for a small company to come back from carnage that could ensue when you guys recommend getting out.

Bottom line: How big of an effect do you think your sell signal will have on those stocks?

An excellent question and a welcome sign of a heads-up investor paying close attention to their personal knitting.

The answer, generally speaking, is that we expect the serious Mania phase in the gold stocks to last at least a year. At some point in the run up, likely six months or so into it, we are going to come to the conclusion that the Mania is headed toward its apex and recommend our subscribers begin looking to lock in profits by selling into volume.

Remember, this is pure conjecture, because it is impossible to say with any certainty what market conditions will be like at the time that we begin to feel the Mania is reaching full stride.

However, as the subscriber just quoted so aptly points out, inherent in the discussion above is the fact that, yes, we are likely to put out the sell signal well before the bull market run is over. That should, we would hope, allow for an orderly exit, over a leisurely period of time. Will our recommendation to take profits at that point cause the stocks we follow to take a big hit?

Impossible to say - as much will depend on whether you, the subscribers, decide to rush to the exits, and what the level of the volume is coming into the stocks at that time. I don't think there is much chance of a mass exodus, however, because it is human nature to hang on longer than is prudent. With markets being in full bloom at that point, the odds are that most of you will want to hang around in the hopes of yet another double.

The best way, as always, of viewing our services are as a source of unbiased, deeply considered research on investments to potentially include in your portfolio. But how you manage your portfolio has to remain an entirely personal activity. When you get a 3- or 4-to-1 shot, we would suggest you do yourself a huge favor and, no matter how exciting the party, don't wait for us to tell you to scrape your original investment and a handsome profit off the table.

This is, of course, a topic we will continue to address over time. For now, however, we are still very much in the portfolio-building phase.

Hi David,

I wanted to share a story with you that I found quite shocking and relevant to many of the topics surrounding the current financial predicament this country now finds itself in.

Since I travel just about every week all over the country, visiting and working with our various customers, I try to get a gauge on how the current financial situation is affecting average working Americans. As part of the general IT strategy work we do, we typically do a great deal of process re-engineering work as well. As I have been recently working with a client in a very rural area, we have focused a lot of our efforts trying to eliminate many HR-related inefficiencies in their organization.

As a result of some of the preliminary workshops we ran the first week, I was shocked to find out that at the current client, their 401(k) plan has witnessed a dramatic drop in the number of participants in the plan over the past 3 years, from a high around 59% participation back in 1998. At present they have about 28% of their employees who opt in to the plan. However, only 23% of the employees contribute the full 100% tax-deductible contribution which the company matches at an average rate. On top of this, their HR department has recently added money management classes due to the number of their employees that now find themselves in an ever-increasing pile of credit card-related debt and in a few cases, bankruptcies.

This is just one example of the plight of Americans and the current negative savings rate which we are witnessing now. Given that this is the second-largest employer here in the area, in my mind this is probably a fairly good representation of the overall community at large. Oddly enough, the local Super Wal-Mart was jam packed with local shoppers purchasing everything from flat screen TVs, to groceries and iPods.

So as much as I would like to think that most of these folks who choose not to participate in their companies' 401(k) plan was out of sheer financial hardship and necessity, I am driven to conclude that there are a lot of people out there who simply do not know how to manage their money properly and just make stupid decisions? It would be interesting to see what these averages look like on a national basis?

Just thought I would share that with you.

Human psychology is very complex. You would think, given that their employers were willing to match funds, and that the money saved has tax advantages, people would happily contribute to their 401(k) plans. It is, however, a well-documented fact that people make financial decisions that don't make any sense.

I also believe that decades of intonations by politicians that the citizenry will be looked after has, in my opinion, led people to an unrealistic view of their future, and a naïve belief in the ability of the government's safety net to hold up when they are ready to plop into it. In fact, I think the biggest problem this country will ever face will be the problem of the indigent elderly... 20 or 30 years down the road.

Regardless, there is a new book out on behavioral economics - i.e., what people actually do with their money, rather than what the economists think they should do. It's entitled Predictably Irrational by MIT professor Dan Ariel. While I haven't yet read it, I heard Ariel interviewed yesterday and found his experiments about how people make financial decisions very interesting. He used as an example the decision making that goes into deciding how much to pay for a piece of chocolate. You put the chocolate in your mouth and it melts, creating an enjoyable taste sensation. But what process determines how much you are willing to pay for that sensation? I plan on reading the book.

A unique site. When you click on the website link below, a world map comes up showing what strange & dangerous things are happening right now in every country in the entire world & is updated every few minutes. You can move the map around, zero in on any area & actually upload the story of what is going on. This "map" updates every 300 seconds... constantly 24/7.

http://www.globalincidentmap.com/home.php

Click on any icon on the map for text update information. It's not just about terrorism - it's about everything happening every minute some place in the world of terrorism threats, explosions, airline incidents, etc.

Pretty cool, if accurate. For instance, you would have thought we would have heard something in the main street media (or "lame street media," as some like to call it) about the Indians being arrested while smuggling uranium. I just googled it, and sure enough, there it is. In fact, if media reports are right, this is the second such incident in India in recent years. As if Pakistan doesn't have enough trouble...

MISCELLANY

Think Your Laptop is Small? In a recent edition of these ramblings, I shared my general optimism about the future of humanity, thanks to steady technological progress. That is, of course, a theme often referenced by Doug Casey, the chairman of this organization and my favorite partner of all times. Doug is looking forward, especially, to the era of nanotech, when all things will be possible. While waiting, we can entertain ourselves with a steady stream of cool new stuff. Here is a link to one of the coolest I have seen of late...

Speaking of Laptops... if you are traveling internationally, you may want to give consideration to the idea that the local border clerks - you know, the ones with the warm smiles and hand guns - may take an unhealthy interest in your laptop and decide they should have a poke around, or just confiscate it outright. Some words to the wise here...

The Stella Awards for 2007 are out (www.stellaawards.com). These are the prizes awarded for the most frivolous lawsuits, named after the woman who sued after burning herself on a cup of MacDonald's coffee. Here's the 2007 winner...

Roy L. Pearson Jr. The 57-year-old Administrative Law Judge from Washington DC claims that a dry cleaner lost a pair of his pants, so he sued the mom-and-pop business for $65,462,500. That's right: more than $65 million for one pair of pants. Representing himself, Judge Pearson cried in court over the loss of his pants, whining that there certainly isn't a more compelling case in the District archives. But the Superior Court judge wasn't moved: he called the case "vexatious litigation," scolded Judge Pearson for his "bad faith," and awarded damages to the dry cleaners. But Pearson didn't take no for an answer: he's appealing the decision. And he has plenty of time on his hands, since he was dismissed from his job. Last we heard, Pearson's appeal is still pending.

This is not a new story, but it is instructive, nonetheless... I knew a judge once who was crazy as a rabid rabbit. Eventually, he too was dismissed after getting caught climbing into the window of his ex-wife's house, gun in hand.

About that Ethanol Stuff. We have made derisive noises about the etha-not boondoggle that is costing you a lot of tax dollars and helping to drive up the global cost of food (33% of all the corn grown in the U.S. is expected to be used for the stuff over the next decade). Well, recent news has it that the demand for ethanol not only pushed up the price of food by 4.9% last year, but that it will double the level of greenhouse gases produced over the next 30 years. Okay, now let's see how long it takes before the politicians pass a law which, in principle, explains, "Oh, about that ethanol stuff... well, hmm, never mind." I'm betting it will take a decade, at least.

Protectionism Watch. The last thing the world needs right now is a trade war. But, as I have commented on previously, it may soon get one. The latest sign comes from the Australian government, which is looking to pass legislation that requires that sovereign wealth funds are "independent from the relevant foreign governments." I wonder what part of the term "sovereign" our friends down under don't understand? Meanwhile, Beijing is none too happy following a decision by a U.S. government panel to disallow a Chinese state company, in conjunction with Bain Capital Partners, to buy 3Com Corp. This sort of thing is happening fairly frequently now, and the pace should only accelerate as people get more nationalistic, urged along by politicians looking to assign blame for economic woes anywhere but where it actually belongs.

That's It For This Week!

There is much, much more one could comment on... the failure of auction debt markets (yesterday 395 out of 641 auctions failed. To get a sense of what that means, consider that since the auction debt market was established in 1984, there had been a total of just 44 failures); the shooting down of errant satellites; the burning of embassies; the invasion of our friends the Kurds by our friends the Turks... but there is only so much time in the day, and other responsibilities call.

A quick check of the screens show that gold is holding strong at $944, oil is $96 and the U.S. stock market is, again, down almost 100 points. Business as usual, I'd say.

Until next week, thank you for reading!

David Galland
Managing Director
Casey Research, LLC